AmazonJP Morgan, displaying a sense of urgency that is perhaps driven by the pending launch of Apple’s tablet-style computeranti-trust legislation which will end the US banking oligopoly, is turning its Kindle devicebanking and payments infrastructure into a platform. The SeattleNew York-based company has announced that it will allow software developers to “build and upload active contentapplications” and distribute it through the KindleChase Store “later this year.” AmazonJP Morgan will be giving out a KindleChase Development Kit that will give “developers access to programming interfaces, tools and documentation to build active content innovative financial services and products for Kindle.Chase” The company will launch a limited beta effort next month. From the press release:
“We’ve heard from lots of developers over the past two years who are excited to build on top of KindleChase,” said Ian Freed, Vice President, Amazon KindleBo Nusmore, EVP, JP Morgan Chase. “The KindleChase Development Kit opens many possibilities–we look forward to being surprised by what developers invent.”
Vertically integrated black box? Or open platform? Which type of bank makes for a more robust system? Which type of a bank is more evolutionarily fit to compete on a level playing field? I know that their is an enormous moat protecting large financial institutions from competition but I would hope they would be using the super-profits that this affords them to prepare for the day the moat is breached. And perhaps behind the parapets they are. Because I pretty sure there are an increasing number of very clever, ambitious (and even angry) folks starting to congregate on the edge of that moat and while it might take some time and a dash of luck, it would seem certain that eventually they will be inside the castle. And then, it just might be too late.
I have long been concerned by the rise and rise of the global mega-bank, first due to my conviction of the impossibility of managing such complex behemoths (with the dangers as we all now know having repercussions far beyond any individual bank’s shareholders or creditors) and also due to the increasing rents such a de facto oligopoly could (and so logically does) extract from the rest of the global economy. I’ve started and then stopped writing this post at least half a dozen times in the past year; partly due to a sense of ‘what’s the point’, partly due to the problem being covered by many with much (much) more influence than I, and partly (I’m somewhat ashamed to admit) due to a small underlying element of self-censorship. As some of you know, we have ambitions to raise capital to allow us to catalyze the re-invention of financial services by investing in companies with disruptive new business models in this sector, and well the big banks are not only potential sources of capital in their own right, but also have significant influence with many of the people and institutions who are potential sources of capital for us. As regular readers know, I try always to tell it like I see it but if I’m objective, I probably have had a tendency to pull my punches a bit when discussing the banking industry. But as the debate on reforming global banking takes centre stage, and at the risk of annoying some of our potential future investors with a dissident opinion, I thought it would be worthwhile to lay out my key thoughts on the subject.
Weak competition is obvious to customers: financial companies demand high fees that are often calculated according to illogical tariffs. Fund managers’ charges, for example, are usually large and are often not linked to the quality, or the real costs of their services.
The lack of competition shows up to economists in the sector’s staggering profitability. In the second quarter of 2009, 29 per cent of US domestic profits came from finance. The profit-generating power of financial companies across the developed world has stubbornly remained higher than that of other companies.
There is, in addition, good reason to suppose that competitive pressures will weaken further. The recent wave of bank failures and mergers, born of the crisis, have left the sector more concentrated. With fewer players on the field – many enjoying implicit state guarantees – competition will be further enfeebled.
But in more advanced economies, rent-seeking takes more sophisticated forms. Instead of 10 per cent on arms sales, we have 7 per cent on new issues. Rents are often extracted indirectly from consumers rather than directly from government: as in protection from competition from foreign goods and new entrants, and the clamour for the extension of intellectual property rights. Rents can also be secured through overpaid employment in overmanned government activities.
Rent-seeking is found whenever economic power is concentrated – in the state, in large private business, in groups of co-operating and colluding firms. Private concentrations of economic power tend to be self-reinforcing. This problem was widely recognised in America’s gilded age. The well-founded fear was that the new mega-rich – the Rockefellers, Carnegies, Vanderbilts – would use their wealth to enhance their political influence and grow their economic power, subverting both the market and democracy. Today it is Russia that exemplifies this problem.
But America has a new generation of rent-seekers. The modern equivalents of castles on the Rhine are first-class lounges and corporate jets. Their occupants are investment bankers and corporate executives.
So much of the conversation seems to revolve around this question of how do we deal with financial institutions which are “too big to fail”, with the turkeys running the world’s mega-banks almost unanimously (and somewhat breathlessly) insisting that breaking banks up would achieve nothing except to hurt customers.
Back in June, I set down my thoughts on what the key issues were in terms of (fixing) banking regulation, highlighting that size (of assets or business) was not the only variable to consider when assessing systemic risk, but that ‘connectedness’ was probably even more important. Certainly the combination of both is something that should ring alarm bells.
Wouldn’t it make much more sense to build a set of rules that explicitly addresses the vulnerabilities of a scale free network and as such focuses disproportion attention and resources on protecting the hubs from attack or failure. The beauty is that the digital global financial system of the 21st century and advances in the science of networks actually now allows us to do this: we can empirically and quantitatively observe, measure and manage the ‘connectedness’ of institutions. Forget the rating agencies, companies like Bonabeau’s IcoSystems and others could help the regulators create, maintain and monitor network ‘maps’ and score each market participant in terms of their connectivity. This should be the defining core metric of financial regulation and mirroring the power law distribution of the underlying network, financial regulation should focus its attention and resources in geometrically increasing fashion.
However it’s pretty frustrating to continue to read much of the ‘financial establishment’ – people who have the luxury and the privilege of being able to speak from the pages of the FT – continue to miss the point entirely and cling to a (slighty) new and improved version of the regulatory status quo. I have enormous respect for Jamie Dimon, and while I agree with him that the system must be re-engineered so as to allow any bank of any size to fail without jeopardizing the system, I disagree that breaking up the biggest banks would be damaging and serve no purpose. The rules need to be reset (to build-in automatic and steeply increasing impediments to growth in size and connectedness), but at the same time the biggest global and domestic mega-banks need to be pruned back to a size that is commensurate with this new paradigm.
The parallels between the rise and rise of Standard Oil in the late 19th and early 20th centuries, and its subsequent government mandated break-up and the rise and rise of giant global banks in the late 20th and early 21st centuries are real. John D. Rockefeller sounded every bit as sincere and paternalistic in calling for an ever bigger, ever more dominant Standard Oil – a company that would bring ‘order’ and ‘stability’ to the market making customers’ lives and choices ‘easier.’ Well of course we know that the market for oil products didn’t suffer as a result of the break-up of Standard Oil, nor did anarchy descend on the US telecommunications markets following the break-up of AT&T. I think you’ll actually find that there is a decent case to be made that things got better in both cases, with more robust and innovative markets and better value for customers. (I highly recommend that legislators everywhere take a moment to read Chernow’s great Titan: The Life of John D. Rockefeller, Sr. before reaching their conclusions as to the merits (or not) of breaking up the biggest banks.)
But the most important long-term reason to consider government intervention in the size and power of the world’s largest financial institutions is that failing to do so will inevitably starve one of the key sectors of the economy of innovation and progress with increasingly damaging results. Indeed, in the conclusion to his column Mr. Kay hits the nail on the head:
Because innovation is dependent on new entry it is essential to resist concentration of economic power. A stance which is pro-business must be distinguished from a stance which is pro-market. In the two decades since the fall of the Berlin Wall, that distinction has not been appreciated well enough.
It’s time for a change. It’s time to shake things up a bit. No?
Using the tried and tested TED 20min format, it was a great opportunity for me to collect my thoughts into (what I hope was) a coherent overview of how I think technological and economic forces will shape the optimally adapted ‘industrial stack’ for the sixth paradigm. It’s a great summary of the prism through which we look at potential investment opportunities and I hope will help us articulate this more powerfully to entrepreneurs and prospective investors.
I’d love to hear any feedback (good, bad and ugly) from any of the eComm delegates who saw my presentation and hope to continue the conversation with you and others here. You can also follow me on twitter @nauiokaspark.
Thanks to Paul and Lee for inviting me and especially to those of you who took the time to respond to my call for input – it was tremendously valuable in helping me to shape and refine my thinking and in building the presentation; just a few years ago, assembling this kind of distributed brainpower would have been impossible, and I hope I never lose my ‘childlike sense of wonder’ at the boundless possibilities that technology enables.)
I first wrote here about Ken Banks and FrontlineSMS a little over a year ago, after having seen him speak at Supernova in San Francisco where he made a tremendous impression. I remember immediately being excited by the obvious possibility of leveraging the Frontline:SMS platform to provide financial services, not only in developing countries but also in more mature markets. I put ‘try to set up meeting with Ken to discuss’ on my to do list, but it never quite made it to the top as the myriad challenges of setting up our business (and moving house) in the midst of generalized global financial calamity conspired to keep it from becoming an urgent priority. Of course (and thank goodness) the world does not wait for me and an enterprising young man, Ben Lyons, spotted the same opportunity and (much) more importantly has moved to action, teaming up with Ken and FrontlineSMS to create FrontlineSMS:credit:
FrontlineSMS:Credit aims to make every formal financial service available to the entrepreneurial poor in 160 characters or less. By meshing the functionality of FrontlineSMS with local mobile payment systems, implementing institutions will be able to provide a full range of customizable services, from savings and credit to insurance and payroll.
Launching FrontlineSMS:credit a few weeks ago, Ben wrote:
Our mission is simple: leverage the mobile space to extend access to affordable financial services to rural, disconnected and impoverished communities. To achieve this end, we are constructing a series of free and open source financial modules that will allow FrontlineSMS to communicate with mobile payment systems in real time, turning FrontlineSMS in to a microfinance management information system, a payroll center for small & medium enterprises (SMEs), a collection and distribution center for micro-insurance premiums and payouts, and a detailed center for individual credit histories and scores.
Now if this isn’t a massive opportunity, well I don’t know what is. At the risk of sounding churlish, it’s an order of magnitude more substantial and important (socially, financially, economically…) than half the me-too start-ups chasing funding and customers amongst the western digerati. Take another look at Ben’s mission statement:
… leverage the mobile space to extend access to affordable financial services to rural, disconnected and impoverished communities.
I suspect the first time you read that you thought “in Africa”, or perhaps India, or developing countries more generally. But these same under-served communities (alas) exist in every country in the world, and one could even make a case for saying that for those living in a developed economy, the relative disadvantage of not having access to basic financial services is even more damaging. It seems inevitable that the approach taken by FrontlineSMS:credit will become the primary channel through which universal access to basic financial services is delivered in any country or economy. Which leaves the politicians of many European states very little time to figure out what the hell to do with all the postal employees currently cashing cheques and taking payments for utility bills, who will soon need to find more productive work. And I’m not sure how complacent I would be as a shareholder in an incumbent retail banking operation (the top executives I doubt will lose much sleep as the timeline for this kind of transition is probably 10-15 years or so, much longer than their expected tenure…) as this bottom up, platform approach to delivering financial services has the very real potential of blowing a giant hole right in the middle of their business and revenue model.
To further whet your appetite here is an excellent 10 minute introduction to FrontlineSMS:credit by Ben at Africa Gathering in London a couple weeks ago:
A couple years ago, I had just decided to try to build what would become Nauiokas Park. I wasn’t entirely sure exactly how I was going to go about it but I had a vision of what it might look like and I knew the market opportunity – to develop technology-enabled disruptive business models in financial services and markets – was vast. Also, Saul and Reshma’s inaugural seedcamp had given me an excuse (or a push) to stop ‘mulling it over’ and ‘get started’ even if I didn’t exactly know what ‘it’ was yet.
One of the first things I did was to start building a database of startups and private growth companies that I thought fell into my embryonic firm’s new investment universe, and one of the first companies I added (on August 29th, 2007 to be exact) was Mint.com. I had first heard of them early that year when they were raising a Series A round and the concept had always appealed to me (and I had always wondered why banks had been so oblivious to it.) I had definitely hoped to be able to take a closer look once I had raised outside investment capital (they were already past the seed stage where I could have contemplated trying to play as an angel) and so it was one of the first companies on our internal ‘radar screen’. Well as they say in the start-up game, it always takes longer than you expect and here we are – one giant financial crisis later – in the fall of 2009 and Mint will now be coming off our radar screen (into our archives) having gone and gotten itself acquired by Intuit for $170mn.
On the one hand, it is exciting to see innovation in the space we are calling our own, succeed and be rewarded. And although I’ve never had the pleasure of meeting Aaron, I would like to congratulate him and wish him continued success with Mint and Intuit. Who knows, perhaps I’ll get to meet him in the future. Maybe when he’s contemplating his next venture? On the other hand, I can’t help but wonder if they sold too soon. I have to insert a disclaimer here – I have absolutely no idea what Mint’s financials looked like – so my view is entirely speculative, but I can’t shake the suspicion that if they had enough traction to get $170mn from Intuit, they had already hit and passed the inflection point and could have aimed at becoming (at least) a billion dollar company and owned the space.
Bittersweet? Well partly for not having invested as an angel but that’s just back-trading, so not really. Mainly it’s because – if the company was for sale – I would have really liked to have been in a position to run our slide-rule over it and, if it made sense, put in a bid, either alone or as part of a club deal with one or two private equity peers. If they have attained critical mass – which it looks like they may well have – it doesn’t take too much imagination (if you live in the sixth paradigm) to see them developing into a multi-billion dollar business over the next 5 years or so. Don’t get me wrong, I understand why management, the angels and the VCs, might find this exit attractive, especially given events of the past 24 months, but I can’t help thinking they’d done the hardest part and instead of letting a winner run, took their profits too soon.
PS If anyone knows where I can find Mint’s financials and projections, I’d love to have a look.
I finally got around to reading the now infamous Netflix presentation on corporate culture. I had more than a dozen people point it out to me and must admit this actually raised my level of skepticism – “sure, ok another vapid corporate culture slideshow…”
I was wrong. I wish I had written this. These 9 values and how they should be implemented align entirely with my thinking and – my former colleagues will have to confirm / refute this – how I tried to run the businesses I was responsible for at DrKW, and how I tried to use my influence on the Management Committee to get the firm to adopt these values. In this latter goal I would have to say I failed miserably. As for the former, I think I was more successful but ultimately it was perhaps futile, surrounded as we were by a sea of culture that was strikingly different.
The sad thing is, I’m convinced had we adopted this culture – and as a relatively small investment bank it was within our control – I think the financial and business outcome for DrKW would have been quite different. I would go so far as to say it would continue to exist today and would have thrived as a nimble and unique competitor in the financial wreckage of the past two years. Instead, it was inevitably destined to disappear: to small to save, big enough to blow up.
But DrKW was unfortunately not unique in rejecting this positive culture. I can’t think of any investment banks that would entertain truly practicing even two or three of the Netflix values, let alone all nine. (I’ve only ever worked for three banks so maybe I’m wrong. Please correct me if you think this is the case.) And yet were they run along these lines, I am certain that the worst of the afflictions that beset the financial system would not have materialized. The crisis would not have been. I know that is a pretty strong statement. But I don’t think it is hyperbole.
There are many talented and extraordinary people in the financial services industry who, fed up with the toxic cultures, leave it as soon as they can afford to. I’m sure you could build an incredibly successful company by attracting this talent with a cultural framework like this. Maybe we’ll be able to do it. I’m sure someone will. I can’t wait.
Bankers like to talk about channels – branches, call centers, internet, mobile. Sell the same products via multiple channels: adapt to individual customer preferences. Horses for courses. In wealthy developed economies, this way of thinking is mostly correct; or more precisely the resolution of the market renders the fallacies (of this way of thinking) invisible. To see the fundamental differences, to understand why – at sufficiently high resolution – these channels cease to be simply distribution mechanisms and become integral to the service being offered, one needs a better economic lens.
Developing and emerging economies provide just that: a high resolution lens on economic activity: in a developing (ie relatively poor and resource constrained) economy, the concept of a ’rounding error’ is ridiculous: micro-everything matters: pricing, transaction costs, payment media, etc. ‘Newtonian’ economics and finance is insufficient to understand how these economies work; you need to look at “quantum” effects. You need high resolution. Why do I find these markets so fascinating and important? Yes, there are many investment opportunities and this is exciting; but we are not yet in a position to really explore these and take advantage and so that’s not the main reason. Yes, it is clearly rewarding to encourage and marvel at human ingenuity that so often leads to success in what are often enormously challenging conditions. But that’s not it either. The main reason I think these markets – especially ‘frontier’ markets – are important, is that by observing the world through the lens of these economies and markets, one cannot help but gain a deeper, more granular, fundamental understanding of how markets work (or don’t work.) The fundamental forces – the risk quarks – that are invisible to the naked western eye are revealed by the tunneling electron microscope of emerging frontier economies.
Nowhere is this effect more obvious than in the cambrian explosion of innovation in markets and services built on the substrate of mobile networks in emerging markets. From the point of view of someone concerned with envisioning and understanding the future of financial services, one of the most pertinent and exciting laboratories is the explosion of mobile trading, payments and banking systems in Africa and other poor, developing economies. I first wrote about this a few years ago, and since then, many of my expectations have been borne out and the potential for disruption – both at home and abroad (ie in the West) – if anything has grown. Indeed one company I wish I had invested in – Obopay – was founded by Carol Realini (who I would love to meet one day) after having spent some time in Africa where she saw first hand how powerful a mobile approach to payments could be.
Of course, although I may have been among the first, I’m by no means alone in seeing mobile financial services as an enormous opportunity, or in seeing the developing world as a key driver of innovation. This is great news as hopefully it will encourage people and institutions with more capital than I to look seriously at investing in developing innovative business models in this space. A few weeks ago CGAP (a very interesting organization, check them out) published a report predicting that:
The market of mobile financial services to poor people in emerging markets will surge from nothing to $5 billion in 2012.
There are about one billion people in emerging markets who have cellphones, but no bank accounts. CGAP expects that number to rise to 1.7 billion to 2012, with around one in five of them picking up mobile money — and creating the $5 billion market.
Most optimistic researchers expect more than a billion people in emerging markets to start using mobile money within a few years, while some are more cautious than CGAP.
Now a billion potential customers – even if they are relatively poor – is a market opportunity even the most jaded venture capitalist should be able to get excited about. But it gets better. I figure if you can figure out how to profitably provide basic payment and banking services to this billion, you probably have a pretty decent business model with which to take on the billion or so people who already consume banking services in more developed countries (and who by the way all have a mobile phone…) These potential customers in the developing world are a dream come true in the sense that if you solve their problems, you’ve solved everyone’s problems (via Reuters:)
“The Grameenbank model works, but the scalability is limited,” said Hannes van Rensburg, chief executive of mobile financial services provider Fundamo said on Wednesday.
“The problem is about the inertia of money. It’s very difficult to move very small amounts of money fast,” he said in an interview with Reuters at the GSMA’s Mobile Money summit in Barcelona.
Access to financial services could not only remove the need for long, costly and risky journeys to move money around, but also reduce the burden of constant, active money management endured by those living on tiny amounts and in constant danger of financial crisis.
“Poor people are doing a tremendous amount of financial transactions just to survive,” says Stephen Rasmussen, who runs a mobile banking program for CGAP, an association of non-profit organizations under the auspices of the World Bank that seeks to help to increase financial access for the poor.
“People at the very bottom spend far more energy and mental time on managing these systems than we do,” Rasmussen told Reuters.
Mobile money deployments have huge momentum, with the number expected to double to 120 by the end of the year, according to the GSMA.
The more cynical amongst you might say: “..yeah, ok. But so what? The big telecom and financial services providers are just going to carve this up and so where’s the opportunity?” I don’t have all the answers but I am fairly certain that most – especially western – large incumbent industry players (from both sides) are structurally and evolutionarily poorly adapted to harness this opportunity. They already have, and I suspect they will continue to frame this opportunity through the low resolution historical lens of their existing business models and approach. Phrases like “We are a bank. We do ‘x’.” or “We are a telecom operator. We do ‘y’.” will continue to be all too prevalent. And so while the giants sit around haggling amongst themselves as to how they can and will divide this market, there will be ample room for the nimble, energetic and open-minded entrepreneur to make her mark.
I hesitate to wade into this debate with my observations or suggestions: it is complex, has been studied at length by many academics and professionals much more qualified than I, and almost certainly does not lend itself to simple, mechanistic solutions. (Which is why I am highly skeptical when any politician suggests that more detailed laws or rules are the answer.) However I’m extremely frustrated with the lack of ‘outside the box’ thinking in this debate – not because it is necessarily where the answers will be found – but because unless one steps out of the frame of conventional wisdom you are almost certainly condemning yourself to come up with sub-optimal solutions. Especially since some of the fundamental tenants that are taken as gospel might be wrong. So with the disclaimer that I don’t pretend that the following suggestions are not without their own problems, I think they are worth considering, if for no other reason than to change the frame of the debate. Indeed I first thought of writing this post 3-4 years ago but it always seemed kind of pointless as at that time, there was absolutely zero appetite for considering any other compensation paradigm in the industry. I mean why would you, right? It was all good. Happy days.
I would suggest that most investment bankers (and MPs) are not paid enough. Enough base salary that is. But wait a second I hear you saying (well perhaps not today but certainly a couple years ago), the strength of the system is you can make a lot of money sure, but only if you perform. Who could argue with that? Well I will. For two main reasons. And I think if my suggested approach had been the norm in the industry, we would not have seen the same degree of egregious and venal behavior and may even have avoided some of the worst excesses.
First is the problem of credibility and the fit-for-purposeness of the bonus. In a system when even average employees in average years get half or more of their total compensation in bonus payments, and top producers in top years get most of their total compensation in bonuses, the idea that bonuses are entirely discretionary and variable is delusional. Paying out zero bonuses – even in poor years – is a nuclear option – the credibility of the bonus as a completely variable element of compensation is significantly if not completely undermined. So in effect the variability (both to the upside and the downside) is in reality highly damped. ie It starts to look like mostly fixed costs; and yet crucially for the employee it is not and so you have the worst of both worlds: the employee does not benefit from the security of a larger fixed remuneration, but the company effectively is committed to paying a high quasi-fixed cost. It’s worth taking an example: imagine a banker with a base salary of £100,000 per year who over the past 5 years has received bonuses ranging from £90,000 in a really poor year for the firm and his activity to £250,000 in a great year. On average his bonus’ have been £160,000 over this time. I would suggest this is a dumb way to pay this professional. Rather his salary should be around £200,000 and his bonus should have been beetween 0 and £40,000 every year except for the stellar year when perhaps it should have been £100-200,000. ie The norm should be c. 0-20% of salary. By taking this approach – given that the employee will value the greater certainty of the second construct, the company will be able to pay this banker less on average and yet have a more satisfied and aligned employee. As long as the first question asked when considering the bonus of an employee continues to be “what did he/she get paid last year?”, the robustness of the bonus process will be somewhat of a farce.
Which brings me to the second point. I can already hear some of you screaming out that this would just encourage a bunch of freeriders and goes against the core tenants of paying for performance. Well no and no. First of all if your employees are being paid these kinds of salaries and choose to freeride, they should be sacked and then you should be sacked for hiring the wrong people. Without exception, the very best professionals I have met, at all levels of the organization, do not work more or less hard because of the money: they work hard because they want to succeed, because they are passionate about their work. And they expect that if they are successful that the money will come. Any of you who have ever worked on a trading floor, do this thought experiment. To the best of your knowledge, what was the correlation between those that worked the hardest, put in the most effort, and those that were paid the most? Clearly, and especially in big companies, there will always be people ‘along for the ride’, trying to live off the efforts of others; often knowing they probably won’t get paid the most but they will certainly work the least. Worse, if push came to shove most people in most organizations can easily identify most people like this. By paying salaries that accurately reflect the value of the opportunity and the median pay for people with the skills to capture the value of the opportunity – I would guess that you would actually have fewer freeriders. The company couldn’t afford to tolerate them. They would have to remove them.
Adjusting the compensation paradigm towards a higher fixed component and a more sensitive and truly variable component (including averaging payouts over 4-7 years, including the possibility of down – ie malus – years) would also go a long way in improving risk management by going with the grain of human nature rather against it. Behavioral Finance 101 applied to human resource decisions. Again I suspect that had banks (a) had proper internal transfer pricing of cost of capital and liquidity and (b) a more salary-based compensation policy perhaps we could have avoided the most toxic behavior that developed in the structured credit market. A lot of the original ‘mark-to-market’ profits that were generated out of thin air (upon which very real bonuses were paid out) essentially were nothing more that arbitraging long term risk against overnight funding and the inability of the bank to charge appropriately for the capital used to allow these trades. Indeed the extreme complexity of many of these structures was imo just plain old misdirection – like a magician’s illusion. It made the profits seem plausible – after all it was really clever stuff – and created an illusion in management’s eyes as to the real source of the profits and the associated risks. Plus these very clever – and increasingly rich – people also, like most of us, liked to show off a bit and so – like musical virtuoso’s – competed to produce the most elegant and complicated embellishments, just to prove what could be done. If the average MD in this business had had a salary of say £500,000 with an expected bonus of £0-750,000; rather than a salary of £125,000 and an expected bonus of £500,000-2,000,000 you would have produced a very different, more healthy, set of behaviors I believe.
To conclude, I’d like to reiterate that I am not suggesting that this is a perfect solution – it clearly has its own problems – but rather I am suggesting that it is a much better system than the existing one, and would produce better and more balanced economic outcomes over time for all stakeholders (employees, shareholders, taxpayers.) So as a roadmap to the great and good who are currently tasked with revisiting pay in banking I would leave them with these three suggestions:
encourage smaller organizations (in particular for high risk/reward activities) where it is much easier to align and monitor the interests of all stakeholders
Morgan Stanley is changing its compensation scheme by de-emphasising the year-end bonus and increasing executive salaries as the Obama administration prepares to introduce a set of broad reforms aimed at changing Wall Street’s pay incentives.
The firm’s board of directors approved an increase in the base salaries of several of its top executives, while at the same time reducing the end-of-year bonus, according to a regulatory filing. Other banks, including UBS and Credit Suisse, have moved in a similar direction.
Wow. Watch them all fall in line now. It’s all about not being different than your competitors. Great to see this idea being put into practice (even if it did take a Level 5 financial storm to do it…) When I first suggested this idea to my peers and bosses 5+ years ago it’s not an exaggeration to say they looked at me like I had horns growing out of my forehead…
When did you ever go to a drug dealer banker, and the drug dealer said, “you know, you should come back tomorrow, this is not very pure. a good deal.” It doesn’t happen.
Much of the blame can be laid at the door of “customer services”, that amorphous tentacular monster that spawns in a global hyperspace disconnected from both banks and their customers. Banks claim to have cut costs by taking operations out of their branches into customer services, but the level of service has been cut even more. Banks are like hospitals. The more you cut nursing staff to save money, the less service you can give patients.
Banks have made it almost impossible to use branches. With great difficulty I discovered the name and telephone number of my branch manager, only to find that a letter I wrote to her had been intercepted by “customer services”, who passed it to her a couple of weeks after deciding that they could not deal with it – nor could she, incidentally.
Building societies once used branches more than banks. But one former building society asked me to deal with three different branches in the course of a year, after shutting the first, then the second, under pressure from its banking parent.
Banks still have about 10,000 branches in the UK. Many are threatened with closure because of mergers, but they will not be so easy to turn into bars in the present property market. Now is the time for our banking behemoths to go back to basics by revitalising their branch networks with real, identifiable people as managers who can offer advice as well as good service to customers.
Clearly there is an enormous opportunity to get this right, using a judicious and creative combination of technology, entertainment and design. And people are at the heart of that equation.
Regular readers might just now be falling off their chairs: “But isn’t the Park Paradigm all about a world of progressive and innovative application of technology?!? What’s this people-centric business model endorsement doing here…” I’m exaggerating of course but I thought this article was a great excuse to reiterate and clarify my strong ideas on the importance of people in many (most) areas of financial services and that my clarion call for an enlightened and progressive embrace of the wonderful opportunities opened to us by exponential advances in technology was almost always grounded in the thesis that it would allow smart, creative finance professionals to offer better, faster, cheaper, more relevant solutions and products to their customers.
Call it hubris – I’ve never worked in retail financial services before – but I am certain that with a blank canvas and by collaborating with various clever innovators in the space, I could build a new kind of retail financial services experience that would beat the pants off most of the mainstream high street banks. In fact, I would guess that the most difficult competitive factor to overcome would be to economically create a sufficiently dense/convenient network of stores, but even here there are a number of potentially creative / non-traditional approaches that may work. It might sound crazy given what has happened in the last 12 months or so, but I’m pretty sure there has never been a better time to start a new bank in the UK. Not top of the agenda for me at the moment, but something I’d love to get involved in before I hang up my spurs. I’m putting it on the list.
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