Episode 83 – Settlement Systems in Detail – Carol Coye Benson, Glenbrook
Reflections on BarCampBankSF2 – A Day of Financial Innovation
Yesterday was the second annual BarCampBank San Francisco. There was a great turn out and spirited conversation about banks and innovation, Web 2.0 and social media, open transactional databases as a foundation for innovation, open source financial modeling for Wall Street and other investors, security as a product, mobile banking, and Open Money. Read on for my notes and observations, plus links to pictures and more coverage.
For those unfamiliar with the BarCamp concept, they are user-organized unconferences: no PowerPoint, no formal agenda, just enthusiasm aided by a lot of coffee, a stack of large post-its and some markers. This year’s BarCampBank San Francisco was scheduled to coincide with Tuesday’s Finovate Startup’09 (hosted by NetBanker.com) and attendees traveled from all over the US as well as from Canada, Spain and France. Many were alumni of previous BarCampBank gatherings, but there were a number of new people too. Everyone I met was genuinely passionate and excited about innovation and banking/finance – a self-selecting crowd, to be sure – gathered inside on a beautiful Saturday.
BarCampBankSF 2 was held on Treasure Island, at the SF Fire Dept training facility. We were hosted by the SFFD Credit Union (thanks, Diana!). Treasure Island is odd place, a tired, semi-industrial former military facility with spectacular views that was originally the site of the Golden Gate International Exposition in 1939. The Fire Department training center is littered with crash dummies and smashed cars. Best quote of the day was from George Favvas of Smart Hippo re:crash dummies and limbs lying around SFFD training facility “Metaphor for the state of our industry?” The cosmopolitan air provided by a high concentration of French and Spanish attendees only heightened the oddity of our surroundings.
Here are some notes and observations based on the sessions I attended (I have to admit, I was non-committal and floated between sessions, so I’ve left out a lot of the discussion). Where my recollection is solid, I’ve tried to attribute comments to who ever made them. But more often than not, I didn’t keep track effectively (too many new faces, dialogue too fast, and I was looking down at my laptop Twittering away). Other BCBSF2 attendees, please use the comments to clarify, expand, and provide links to your own blog coverage. Thank you!
Banks & Innovation, How to Engage with Gen Y through Web 2.0
As often happens at a BarCamp, topics that seem related get combined in one session as there are lots of good topic suggestions and a limited number of discussion rooms/time slots. This was a free-wheeling session that covered marketing, Web 2.0, community banking, and innovation.
This discussion opened like this: imagine very tall man with arms extended fully saying innovation is here (one hand) and banks are here (other hand), a table full of people nodded their agreement.
Do we need another kind of a bank, a new bank all together – combining the community values of a credit union with new Web 2.0 technologies – to create a virtual bank? Banking presence/applications on Facebook and within other social networking sites haven’t taken off. We need something more, something different. The social sites (and Facebook in particular) are very controlling of their platform, and developers feeling trapped, unable to innovate freely. [Update: see news today – Monday 4/27 – about Facebook opening up the platform to developers.]
Most banks approach social media as they have historically approached marketing. They attempt to manipulate consumers, utilizing social media to push messages rather than genuinely engage with customers and potential customers. It is very difficult for bank brands in the social web – who is going to be passionate about their bank? It’s not like Nike’s brand! ING Direct has had some success – using a “we’re not like the other guys” message – the group proposed taking a similar approach to create a different kinds of bank. USAA is a another example of a virtual bank – no branches, high touch, excellent customer service, loyal consumers – but closed to military and their family. And non-profit, too.
General agreement that it is a great time to start a bank, competitors are distracted, and use the Internet to scale at a low cost. But how to generate grass roots momentum – get attention within bank, within communities? For banks, local is the new global. But local doesn’t mean what it used to mean, it’s no longer about geography – a contribution from @dgwbirch in the UK via Twitter.
Classical marketing mentality isn’t appropriate in Web 2.0. Banks and other financial entities need to ask themselves, what do I have to contribute to my community (virtual or geographic)?
A new brand is better than an existing bank – can a bank (with its culture, reputation) create something like Yelp?
What conversation do consumers want to have about banking? That’s the problem – they don’t! People switch banks when either they experience a life event, or they’re pissed off. Otherwise they leave things on autopilot. Banking may be boring, but it is not optional.
Customer acquisition is very, very expensive – use social media to address customer concerns, listen to their needs, retain them.
Arshad Syed, whose company is still in stealth mode, said never mind the banks, focus on retailers, use gift cards – an underutilized settlement method. He’s interested in developing a communities can raise funds for individuals as well as NGOs via Web 2.0 and observed that in a community the members self-police, and mitigate risk. A community can raise funds for specific purchases, e.g. students raising tuition, non-profit raising funds for laptop. The group validates members, develops trust.
Someone observed that customer relationship management (CRM) shifts to vendor relationship management (VRM) as customers gain control of how they manages their relationship with banks. Mint, Wesabe, etc are doing an outstanding job of creating community around banking products and attracting GenY.
Someone lamented that oftentimes, technology is in search of business questions, rather than the other way around. There was a good suggestion to use crowd sourcing for ideation, rather than have internal brainstorming sessions.
And, finally, a cautionary tale from Arno Hesse: subprime mortgages + credit default swaps used to be considered bank “innovations.”
Security as a Product
Security is often viewed as an entitlement for bank/financial institution customers. Yet it is a value-add for online competitors, e.g. PayPal. It is hard to boast about how well you manage security without freaking out customers (“We prevented 17,000 fraud attempts!”).
The group urged banks and other payment companies to be transparent about security breaches/instances of fraud. To be open about how it happens (downstream from FI, for instance), how to avoid going forward: actions that the consumers can take to safeguard their data, actions that banks are taking to safeguard data.
One idea, why not offer customers a choice when there has been a breach – do you want us to re-issue your card, or not? Is it worth the hassle for you, or should we let you keep your card number and simply flag your account as compromised, and provide additional monitoring for potentially fraudulent activity?
Can a bank or payment network charge for security? E.g., charge for an RSA token? PayPal issued them for free and no one used them. But when they started charging for them, everyone activated. All of a sudden, when security had a price, it had value.
(Note: I missed the rest of this session.)
Open Transaction Database Aggregating Consumer Purchases
(Note: I missed the beginning of this session.)
Who benefits from using anonymous transactional data? What are the applications?
FIs, card networks are not going to share data – consumer must be source. How to motivate consumers to share their data? There is genuine consumer pain: What on earth was this charge? Is it fraud? Or did I buy something and I can’t remember – or more likely, don’t recognize the merchant on my statement? Card network data gets truncated along the way – merchant has complete info, but will not share. But consumer can elect to share data, using some sort of widget that strips out personal identifiers and normalizes data, then uploads with geographic identifier (zip) and demographic data (female, 40s).
Open data tends to be a platform of innovation, for instance it took years for the SEC to publish filings via Edgar Online and now there is a wealth of financial data available online. [Aside from Erin, the great promise of XBRL, tagged XML financial reporting that is mandated for the top 500 public companies starting this year, will take Edgar Online to a whole new level.]
The open transaction database suffers from the chicken & egg conundrum – who is going to provide data if they aren’t any applications built to leverage the data?
A consumer end-run around financial institutions and others that safeguard transactional data may be viable. But what would motivate a company to share their transactional data, aggregate it with consumer provided data and other company’s transactional information? What if a company like PayPal were to share data? What’s the benefit for PayPal? How can this data be turned into a service that is useful to consumers?
Consumer value add: Store transactional data safely and securely forever. Not just the last 12-18 months worth of PDF statements (unsearchable!) that my bank maintains. Not just seven years worth required by the IRS. All of it.
What about businesses? Small businesses would benefit from something like Google Analytics to mine transactional data (perhaps aggregated by merchant processor, or PayPal). Provide slick reporting and searching. All the promise of a huge ERP system without the expense and headache. [Aside from Erin: this is related to the Payments as a Service concept that we here at Glenbrook have been talking about recently.]
Apparently there is a ton of open data in Denmark. General agreement that it’s sad how unavailable data is for policy makers, economists, etc. Companies are terrified of revealing information about layoffs, for instance. Yet the local paper reports when Company A lays of 10,000 people. Economic data, such as the number of layoffs by industry, per regions, etc. is very difficult to aggregate on a macro level for policy makers in Washington, DC.
Conversation about transparency as a means of avoiding financial gyrations we are experiencing today.
And finally, we cannot ignore the most important question: how predictive is this dataset? The data must be accurate and clean. There are methods to measure the predictive value of a specific pool of transactional data.
Mobile banking in developing world – lessons for the developed nations?
(I didn’t stay long at this session, but this is what I heard before I left.)
Branchless banking has taken off in Africa. The discussion mainly focused on the M-Pesa example in Kenya. Over 20% of Kenyan’s use m-pesa branchless banking. Transactions are conducted via SMS on mobile phones and individuals deposit and withdraw funds at local stores.
From the M-Pesa website:
M-PESA is a Safaricom service allowing you to transfer money using a mobile phone. Kenya is the first country in the world to use this service, which is offered in partnership between Safaricom and Vodafone. M-PESA is available to all Safaricom subscribers (Prepay and Postpay), even if you do not have a bank account. Registration is FREE and available at any M-PESA Agent countrywide. The M-PESA application is installed on your SIM card and works on all makes of handsets.
Banks in established markets have regulatory concerns – for instance, money laundering considerations for re-loadable phone, how to perform know your customer at each re-loading location? Allison Miller observes that’s why cash-in is a challenge — most of the mobile top-ups are functionally anonymous.
Do small businesses or individuals need transactional capability via mobile phone in rural/non-banked areas of the world? Both. We discussed mobile banking as a foundation for financial infrastructure in developing nations, an enabler for far more than checking balance. Discussion about how innovation and economic growth has always come from small businesses. Reducing operational friction = key for economic development.
Question whether we are discussing banking vs. payments. Are we talking about traditional banking services, e.g. making loans, charging interest? To what extent does this encompass microfinance and developing credit history, to build economy?
Additional topics that were touched on in this session: cell phone airtime as a virtual currency, and apparently in Brazil you can load your cell phone at an ATM. [If anyone has good examples of either of these, please suggest URLs in the comments.]
Open Source Financial Modeling
(Note: I missed the beginning of this session. There were a few people with deep expertise in financial modeling and risk management, a number academics and advocates of open source development, and a few others – myself included – without relevant expertise but a lot of curiosity.)
Someone definitely not from Silicon Valley described it as the land if hippies and doing good. But of course Google makes a fortune doing good. Agreement that open source fervor is necessary to accomplish truly open financial modeling. But how do you foster enthusiasm for sharing in an industry where proprietary models have been a source of competitive knowledge and quantitative expertise from academia and applied science has been recruited to built ever more complex models. Open source may be “the world of unicorns and rainbows” – yet contributors have personal motivations as well. How do you tap both personal and financial motivations?
Is open source financial modeling viable? Is it too risky for traders – if I lose big $$$ due to a bug in the code, who do I come after? One jaded (but realistic) suggestion was that you would fix the broken code in your version, not tell anyone else, and profit vs. the others using the unfixed code. That is, of course, the way Wall Street.
What are the incentives for financial modeling – to make the world better, to mend a broken industry, to more accurately measure risk or make a ton of money? Investment bank incentive is to make money. Period.
Discussion about Silicon Valley as a place where people have the resources, and inclination, to explore new (open) technologies. Can they build financial models more effectively than Wall Street bankers?
Financial models are predicated on the belief in the power of statistics to predict the future. Predictive models that account for 1/100,000 chance, require a vast amount of historical data (5000 years!). Models require intensive Q/A to measure whether or not they are predictive, comparing results to historical patterns. These activities could be open-sourced.
Mary Kate Stimmler, a PhD student at UC Berkeley is doing behavioral economic research on risk management and confidence on Wall Street. She observes that there is a direct correlation between the complexity of the model and the confidence in the model, regardless of whether or not the model is actually valid. Mary Kate notes that traders that are lucky get promoted, have (false) confidence in models. Those that are unlucky, and have doubts about the models, do not get promoted, do not lead the culture, and eventually leave the industry. Thus Wall Street suffers from overconfidence and, sadly, we have all learned (suffered from) the consequences of this phenomenon.
Next I attended a session about communicating risk, especially in a way that is that is not alienating to non-statistical people. There is a negative user experience associated with false negatives (fraud) and false positives (angry, honest customers).
People in the room had varying reactions to bank efforts to curtail fraud. Some of us are pleased when the bank stops you from making an out of pattern/suspicious transaction, feel that we are being protected. Others are outraged when their bank prevents them from making a given transaction – so much so that they cancel the card.
We agreed that consumers are far more worried about identify theft, than about fraud. They aren’t concerned about protecting their credit card number. They know they are not liable for fraudulent transactions on the credit card.
Banks (card issuers) have ensured that their customer does not perceive the cost of fraud.
(Note: I missed the beginning of this session.)
The Open Money enthusiasts at BarCampBank were thrilled to have an opportunity to meet Michael Linton. He is the founder of the LETSystem, a set of tools and rules for local currency, developed for a program started in Canada (Vancouver Island) 25 years ago and continuously tweaked since then. LETSystem and Linton himself have inspired similar efforts in a number of different communities.
I won’t attempt to explain the Open Money concept, there’s plenty of info here:
The primary principles of Open Money are that it is community based,
Communities can use open money for simple things like Local Exchange Trading Systems (LETS), Time Banks, barter networks, carbon-emissions trading programs, baby-sitting co-ops, reputation tracking systems, business loyalty programs, etc.
Additional non-currency examples of exchange:
Couch Surfing – Earn credits by hosting travelers in your house. You can redeem the credits by staying with others. There are 3,000 transactions per day occurring on Couchsurfing.com. They are not taxable because it isn’t a reciprocal barter.
Twollars – A new, Twitter-centric form of virtual currency. If you like what someone you follow on Twitter does or says, you can send them Twollers. It’s like a tip. All Twitter users have 50 Twollars to start out. The company is working with Corporate sponsors to link Twollars to charities, so individuals can donate their accumulated Twollars and the Twollars will be matched by sponsor’s real money donations.
There was much discussion of community currency as a “transport layer” on which additional transactions can be built. Many felt that RFID stickers are a significant new development for open money communities as a means to incorporate “on the street” transactions.
Taxation is a challenge for local currencies: how do you encourage adoption – should government support/incent? How do get the tax man to accept the community currency, too?
One of the most important features of local currency is that it is meant to be spent, not accumulated. The idea is to support your local economy.
We had a historical tangent, exploring the source of fractional reserve banking – thanks to Issac Newton (how’s that for trivia?) – learn more here.
Proponents of open money and local currency wonder how to build accounting systems that support and encourage transactions with non-currency. There was some debate about openness versus anonymity. If local currencies are all about openness, and trust is difficult without establishing a good reputation – hard to do in an anonymous system.
Michael Linton quoted Shakespeare to demonstrate the importance of reputation. In Othello (Act 3 scene 3), Iago says:
Good name in man and woman, dear my lord,
Is the immediate jewel of their souls.
Who steals my purse steals trash; ’tis something, nothing;
‘Twas mine, ’tis his, and has been slave to thousands;
But he that filches from me my good name
Robs me of that which not enriches him,
And makes me poor indeed.
What is the role of banks in the open money world? Perhaps as protectors of reputation, authenticating participants. The group concluded by touching on global currency and noting that “we are at the AOL of money, there much more excitement and innovation to come.”
I met – and reconnected with – a number of interesting people, learned of some intriguing start-ups, and had a number of thought provoking conversations. It was a great day.
- Real-time coverage on Twitter (hashtag #bcbsf2)
- Photos from BarCampBankSF 2: Picasa and Flickr
- About BarCamp conferences (all industries, not just banking)
Additional blog coverage
- Jean Michel Billaut (in French)
- (more to come – bloggers, pls send me links to your BCBSF2 coverage)
Upcoming BarCampBank events:
- BarCampBankVegas is set for May 2, 2009.
- BarCampBankCharleston2 is set for June 13, 2009
- BarCampBankGermany is set for October 23-25, 2009 (Frankfurt or Berlin)
- BarCampBankCharlotte is currently being planned
- BarCampBankMadison is currently being planned
- BarCampBankBarcelona is currently being planned
- BarCampBankEstonia is currently being planned for Autumn 2008.
- BarCampMoneyNYC2009 is currently rescheduled from 6-7 March, 2009 to a later date