Money, banking & insurance

Banking without banks

We wrote about Zopa.com (a UK based peer-to-peer money lending site) a while ago so it’s nice to hear that the site now has 50,000 members and so far no bad debts. It’s also interesting to learn about the launch of a US-based equivalent called Prosper.The idea is much the same in that the site seeks to remove retail banks from the business of lending or borrowing money. Borrowers bid for how much money they want and how much interest they’ll pay, while lenders bid on how much they’ll lend and how low an interest rate they’ll accept for a specific credit profile. Prosper then makes money by charging borrowers 1% of the loan and by charging delinquency fees and lender fees. Zopa, in contrast, takes a percentage of the repayment insurance fee. Another difference is that unlike Zopa, which reduces risk by lending on a ‘one-to-many’ basis, Prosper allows individuals to front an entire loan if they wish. Prosper also places each individual into a group and asks the group leader to verify the authenticity of each individual member. Once accepted each individual then assumes the reputation of the entire group(much like the community aspect of Grameen Bank in India). Will either of these new ideas work? Who knows, but someone (eventually) will make a big business out of removing banks from the money lending and borrowing equation, not least because most people (certainly most 18-24 year olds) would rather deal with a group of like-minded individuals than a faceless corporation.

Outsourcing monetary policy

You may have missed this, but a few years ago Ecuador and El Salvador both outsourced the setting of monetary policy to the US. Local currencies were abandoned, the US dollar was adopted and Mr Greenspan at the US Federal Reserve was effectively in charge of both economies. There are currently about 200-plus currencies traded around the world but the trend is undoubtedly towards either dollarization or euro-ization. The advantages generally include higher GDP growth, lower interest rates and stronger fiscal discipline. Tying a small currency to a large regional super-power also tends to mean that ordinary citizens are more protected against rapid inflation or devaluation, both of which can wipe out private savings. On the other hand, there is still no guarantee that countries will default on debt and letting go of national currency is often seen as a loss of national sovereignty. Moreover, its one thing to hand over your currency to the European National Bank and get a seat on the board in return, but no such option was given to Ecuador or El Salvador. Unless political systems and workforce laws are integrated too, this can also cause problems. Nevertheless the trend looks set to continue.

The future is not what you think

It might strike some people as odd that in a time of Internet banking and e-commerce many banks are actually investing in their physical branch networks. Surely we should all be banking from home with our computers or banking on the run through various mobile devices? HBOS, the merger of Halifax and the Bank of Scotland in the UK, is investing in one of the biggest branch expansions in thirty years at a cost of around GB £100 million. The same trend can be seen with many other banks (especially community banks) in the US and other countries. Part of this investment is in better sites but money is also being spent of trying to make banks friendlier, easier to use and more convenient. Is this a trend that’s set to continue? The answer depends on whom you talk to and also what happens to the economy. Generation Y certainly won’t be flocking into physical branches unless they deliver real advantages over and above online or mobile banking. Conversely, the ageing population in most developed regions will probably stick to what they know – which is real people and real branches.

Latest banking innovations

It’s been a busy few months in banking circles with a host of new developments although many of them seem to be knee-jerk reactions to innovations in other areas rather than real strategic plays. For example, in Europe Postbank (a subsidiary of ING) has put a Skype VoIP link on its banking website so that its younger customers can talk to bank staff. Meanwhile, over in the US, Sun Bancorp has launched a series of podcasts for a its new mortgage subsidiary. Apparently the podcasts feature bank executives talking about the process of applying for a home loan. Other US banks using podcasting to send their customers to sleep include UMB Financial Services, City National Corp and TowerGroup Inc. According to one bank executive “only about 100 people have downloaded the podcast about retirement savings”. You don’t say! A more interesting development is perhaps the launch of China’s first TV bank in the city of Shenzhen. This uses suitably-equipped TVs to make transactions which are apparently more secure than Internet systems because the Digital TV network is much smaller.

e-Money in Japan

Use of electronic money in Japan is growing rapidly with the number of transactions reaching 17 million through the two largest providers (Edy and Suica) last December.
26 million Edy and Suica e-money cards have now been issued in Japan, which translates to about 20% of the Japanese population. The level of Edy-equipped (Edy ready?) mobile phones has now hit 2.4 million (with another million in the pipeline for next March) and over 30,000 retail stores now accept these methods of payment. Meanwhile, the number of coins in circulation in Japan (91.5 billion if you’re wondering) recorded a fall for the first time last year.

And finally …

A bank in Japan is promising to increase the interest rate paid on a deposit account if the level of waste recycled in the local region increases.