Private Banking 2.0

Since the emergence of online banking there has been a fundamental assertion from high-net-worth bankers that their clients aren’t digitally focused, they don’t use social media or mobile banking, and that they prefer to pick up the phone and engage their banker because the nature of their interactions is defined by their wealth – they want the highest-level of service that only comes from engagement through a personal banker.

Is this business immune to disruption, despite the rest of the retail bank being in an extremely disruptive state? It’s apparent that Private Banks are now seeing customers move more frequently to multi-bank relationships because the basic digital hygiene factors within the Private Bank are not taken care of. For a Private Bank to claim that they are the best of the best, but to be amongst the worst digitally is contradictory.  So the depth of the relationship and scale of AuM (Assets under Management) are suffering because of lack of web, mobile and social capability, and Private Bankers are seeing a fragmentation of service offerings as a result of service perceptions.

If we look at High-Net-Worth-Individuals (HNWI), the facts are that they are extremely service conscious and generally loath inefficiencies. Entrepreneurs and successful business people in the HNWI category were the first to get Blackberry’s, the first to get wireless broadband modems so they could work on their laptop in the limo from the airport to the office or sitting in the Maybach running around town, amongst the first to get the cool new iPad or the latest gadget. So right now, clients of private banks are asking – why can I login and do this day-to-day stuff through HSBC, Barclays or BofA, but I can’t through my Private Bank?

So where does technology fit, and can it provide real value? Is there a way that technology can deepen relationships with clients, or does it mean that relationships are less sticky because they are doing more interactions with the brand electronically?

The digital relationship

Recently a well known ex F1 driver and commentator was spotted on Twitter asking his Private Bank, Coutts of London, whether they had a local branch in Miami. The Coutts team respond within just a few minutes of seeing that enquiry come past the Twitter account and letting the F1 driver know that his Banker would be on the phone to him in a jiffy. Such a response is not the norm.

When presented with this sort of scenario, many Private Bankers scratch their heads and ask why a distinguished client like an ex-F1 champion would use Twitter to talk to his Private Banker instead of a simple phone call? That’s not the point – you can choose to approach every single client and ask them why on earth they would want to use Twitter, or you can simply understand that an emerging channel like Twitter needs support.

As the next generation of Private Banking clients start to take over from their parents, the last thing you want is to be identified as that stodgy, old, out-of-date bank that my father used.

Stereotypes that Private Banking clients don’t do Digital are just wrong…

Maximizing the client interaction

Perhaps the biggest revolution is in the primary face-to-face asset allocation meeting with the client. Over time we have gradually increased complexity as a result of KYC and risk, for what used to be a simple chat between a client and his banker. Now we load up our client with forms, risk profile questionnaires, with brochures, technical data, etc. that doesn’t actually enhance the relationship – it just complicates it.

Soon we’ll be asking the client to do the risk profiling stuff at home online and we’ll verify this with the client face-to-face. We won’t ask the client to fill out the same compliance information on a paper form that we’ve already asked for 20 times before, because we’ll execute electronically using the data we already have stored.

When we sit with them in a planning session, we’ll use tablet based tools that allows us to show our clients what-if scenarios and adjusted asset allocations that work better for them, then we’ll give them a selection of product decisions which they can learn more about at home online or execute electronically from behind the login. Why?

The real revolution here is in simplicity of the interaction. By maximizing time with our client for discussing their needs, and shifting other activities to supporting channels, we improve service levels. Even the humble monthly statement will be digitized with interactive components explaining market movements, the client’s net position and short-term investment opportunities.

Social Scoring

In respect to client acquisition, the world of transparency through social media will increasingly start to impact banks in the coming 2-3 years. Brands and private bankers will be anonymously scored online as to their effectiveness. Just like dating services, social networks will be able to match bank’s relationship managers with clients based on their expertise, location, and their ranking amongst peers.

When we search for Private Banks on Google or YouTube, what results will we see? We won’t any longer see the most popular brands, but the most respected brands amongst our peer group based on your social score. Unless you have a strong connection digitally with your clients, your social score is going to hurt you on the acquisition side of the business. After all, Private Banking is first and foremost about trust in your advisor – if my friends don’t trust and recommend you, how can I trust you?

Conclusion

Once thought immune to the changes in multi-channel engagement, it turns out that perhaps the most important clients in the retail banking marketplace need to be highly connected, to provide the required service levels. For most private banks, this is an epiphany and hence, we’re seeing aggressive investment in this space today.

If you want to be the trusted advisor – it is clear you need to be connected and recommended. Engagement is no longer limited to a phone or face-to-face, the private banker must extend his reach to clients at every opportunity. A deeper relationship, depends on context and connection – not just a brand and asset management capability.


UK Olympics to trial new RFID biochips embedded under athletes skin

In the latest attempt to capitalize on the NFC and RFID hype, the rumor mill has exploded with news that the IOC and the team behind the London Olympics is trialing new RFID bio-chips. The micro RFID chips that will be injected under the skin of the shoulder of professional athletes, will be used for everything from entry to secure venues, payment for meals and beverages in the Olympic village, and even linked to personal bank accounts for payments.

This is not new technology. As far back as 2004 it was reported that the Baha Beach Club in Barcelona was injecting VIP patrons with RFID chips to replace credit cards and membership ID cards. Athletes will have the option of either the traditional contactless NFC card, or opting in for the RFID chip. However, officials from the London Organising Committee Of The Olympic Games were quick to explain the benefits of the embedded technology including the fact that athletes themselves would not have to carry a physical card to gain access to secure venues, accommodation or to pay for meals, services and souvenirs.

Mary Coleman-Brace, the spokesperson for the LOCOG said of the technology:

“While some may consider this invasive, it is a tried and tested technology and we hope to incentivize athletes by offering them discounts on a range of Olympic village services, also offering spot prizes for those that participate in the program. We believe that this sets the tone for future Olympic village constructs by defining a truly innovative security and payments device that the athlete can carry with them at all times. It also enables us to track the athletes and we’re looking at trialing the integration of the RFID technology in respect to performance measurement for elements like track-and-field race timings also.”

Visa is said to be considering a rival technology where an embedded chip is not required, but a temporary athletes tattoo placed on the skin would be used in a similar manner to the RFID chip. The tattoo design, incorporating a hybrid of the Visa and London Olympics logo, would incorporate a micro-NFC device that was low irritant and could survive contact on the skin.

RFID chips in use at the Cebu Marathon in 2010

While this is the first time that technology under the skin is being considered for an Olympic event, there has been the use of RFID technology already in many sporting events. In January, 2010 at the Cebu marathon, athletes wore RFID tags that measured their performance and times over the 42k race. LOCOG officials pointed out that in recent years there has been rapid improvement in the miniaturization of the technology, allowing it to be less invasive.

So what do you think? If you were an athlete would you be up for the RFID technology? Or would you realize that stories like this on April the 1st carry some risk?


If your bank is opening branches – get worried

In my recent book Bank 2.0 I posited that I wasn’t against branches and that rather than advocating the wholesale closure or departure from branch networks, that I was interested in seeing branch focus/form change. The reality is though, the more and more I look at what is wrong with the whole retail banking business in respect to innovation and change, the more that branch-led distribution thinking is killing the ability to innovate because of bloated legacy cost structures.

Branch networks have to shrink
Let me put this out there on the table right now. The current network of branches for most retail behemoths has absolutely no chance of survival in the near future. I’m not talking 10 years out here… I’m talking in the next 2-3 years. Which is why I was bemused by the following piece of news a couple of weeks ago in the WSJ:

The New York bank, No. 3 in U.S. deposits as measured by the Federal Deposit Insurance Corp., wants to expand the Chase name. Some expected an acquisition. Instead, Charlie Scharf, the head of retail operations, said J.P. Morgan would build 1,500 to 2,000 new branches over the next five years–an expansion equivalent to the entire branch network of a large regional bank.
Wall Street Journal: JP Morgan Sees Long-Term Payoff In Huge Branch Expansion, David Benoit (Dow Jones Newswires), Feb 16, 2011

JP Morgan is hoping to add $2Bn dollars in pre-tax earnings by 2025 off the back of this move. Are they serious??

Let’s just look at a few of the facts:

The action is all in channels, not in branches.

Bank visitation and utilization is in decline, cross-sell effectiveness has leveled off, and there is massive debate over what the branch should look like? Bank’s aren’t building deeper, richer customer relationships through branches – despite what they might wish. Branch usage is in decline, costs of branch distribution infrastructure is increasing and ROI is decreasing, the skill mix of staff required is changing and the new resources required to differentiate are expensive and difficult to find and train. The future of branch looks pretty bleak.

Citi's new "Apple Store" - A better branch won't solve your problems...

Why are big banks slow to change?
The bigger the bank brand, the more they already have invested in physical real-estate. The most powerful individual in the retail bank, besides potentially the Head of Retail, is going to be the guy with the biggest bucket – the Head of Branch Distribution. In this environment, strategy is led by those with the most power and leverage internally and much of that is still down to P&L.

In this environment, the instinct of the banker is to fall back on old established habits and to lead with a branch distribution strategy when there is spare cash for growth, rather than experiment on something new like Mobile or Social Media. It’s why a bank like JP Morgan Chase, HSBC or Bank of America will spend 90-95% of their “channels” budget on branches still today, flying in the face of all logic to diversify channel expenditure in a major way. It’s why very few of the bigger banks still are yet to appoint a head of mobile or a head of social media.

Sure digital channels are cheaper to run, and you can’t just close half your branch network overnight, but the mix of investment is simply wrong. If you don’t start by reinventing the engagement of customers across every channel, then one day you are going to be stuck with an irrelevant business.

One positive example of adaptation is the recent appointment by TD Bank of Brian Haier to the role of Head of Direct Channels and Distribution Strategy. Brian’s background was leading the Retail Distribution business for TD Canada Trust with a salesforce of 25,000 frontline staff. I guess TD figured out the best way to solve the budget problems was to take one of the Branch guys with the biggest buckets and simply put him in charge of Direct Channels so there would no longer be any argument about where the future of the bank lies.

For JP Morgan Chase, on the other hand – if I was a shareholder, I’d be offloading stock, quickly…


VIDEO: Opportunities in the Underbanked Space

With somewhere between 40-70m underbanked in the United States alone, there are significant opportunities to re-think where these individuals fit in the banking landscape.

Since the introduction of the Durbin amendment the likelihood of more of this segment entering the mainstream banking sphere is further reduced. How will mobile payments and pre-paid debit cards effect this growing segment?

Video Briefing – Opportunities in the Underbanked Space


Why Basel III is bad for finance

The Basel III accord’s stated purpose is:

This consultative document presents the Basel Committee’s proposals to strengthen global capital and liquidity regulations with the goal of promoting a more resilient banking sector. The objective of the Basel Committee’s reform package is to improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source, thus reducing the risk of spillover from the financial sector to the real economy.
BCBS Consultative Proposal: “Strengthening the resilience of the banking sector”

The intent of the Basel accords must be to afford consumers, shareholders, the corporation, and the ‘banking sector’ at large, more generally protection from shocks, abuse, corruption or intended manipulation. In that respect, Basel broadly takes a position of “trust no one”, and builds into the system a comprehensive framework of understanding, monitoring and mitigating any risk of sufficient intensity that it could do harm to the sector or players.

Reflexive Feedback loops

The issue with this approach is, of course, that by creating a set of rules and by changing the system, this very approach generates a reflexive feedback loop that increases complexity of the processes between customers and the institution, and between the institution and third parties. The more complexity that is built into the system, the greater the likelihood of abuse as complex systems are harder to control or police.

While payments, interbank networks and such may appear inordinately complex, there are those that maintain that such networks produce predictable or measurable behavior in response to specific shocks or trends, but essentially this is through either the emergence of a dominant sentiment (i.e. the old “buy on rumor sell on facts” saying) or through exogenous events.

Tracking complex interactions in the Fed Interbank payments network

While some claim that sentiment analysis through tools like Twitter, might predict the way the network or market will move in the short-term, the problem with Basel III is that its very complexity might possibly have a deleterious effect on the market as a whole, but most certainly on the effectiveness of the institution. The primary concern for institutions will be that Basel III might actually reduce the ability of the organization to respond to shocks in the system, because it might be outside of the approved risk management process. Essentially working exactly the opposite to its intended purpose. However, the implementation of Basel III could actually have a more short-term effect on institutional competitiveness.

Lessons from the regulation of markets

ICBC was the world’s largest IPO in history to-date. There was much discussion over this IPO, but it was telling that ICBC chose, not New York or London to launch their IPO, but Hong Kong. The long and the short of these discussions are essentially that the US market, in particular, is now too heavily regulated to stay competitive on a global stage as a capital market. The US continues to find some momentum around its reputation as the biggest and best market, but a number of proponents of change in the US cite the medium-term demise of the US capital markets as a real risk. For example, Professor Hal Scott, in his paper “Competitive Complacency in the decline of US Public Equity Capital Markets” (May 2007) challenges regulators and the market in this way:

While America’s public equity marketplace is still winning the war as the world’s most dominant marketplace, it is losing many of the key battles to foreign and private markets. America is losing its place of primacy, power and influence as the global leader in public equity capital markets competitiveness. Further, the evidence is equally compelling that New York is losing its place as the dominant center for global financial markets. There is a tremendous price America’s economy may pay for failing to compete sufficiently to stay ahead of its global rivals.

And further in respect to the US regulatory environment

“What we are witnessing is the latest chapter in the evolution of the euromarkets. In the past, US banks moved to London to escape onerous banking regulation and the eurobond market was created in part to avoid US taxes. Now exchanges are moving abroad in part to avoid the US capital market’s regulatory regime. Europe should not be threatened. It is the US that should be concerned. Once a market moves abroad it is difficult to get it back.” – Hal Scott and George Dallas

In a report commissioned by Mayor Michael Bloomberg in 2007, supported by the strategy research firm McKinsey, Bloomberg states the shifting competitive environment in the following way:

“Traditionally, London was our chief competitor in the financial services industry. But as technology has virtually eliminated barriers to the flow of capital, it now freely flows to the most efficient markets, in all corners of the globe. Today, in addition to London, we’re increasingly competing with cities like Dubai, Hong Kong, and Tokyo.” – Michael Bloomberg, Sustaining New York’s and the US’ Global Financial Services Leadership, Jan 2007

So as competition heats up, the heavy regulatory environment of the US and UK markets has not actually helped those markets to be more competitive, in fact, exactly the opposite. The downside of taking a heavier approach to risk mitigation and management is the reduction of competitiveness. In this respect, while dotting the i’s and crossing the t’s Basel III doesn’t contribute positively in any immediately recognizable form to the competitiveness of an institution. In the long-term, we might argue that Basel III is ultimately about insurance, and reducing future risk, which will make you more robust or less risky than your competitors who don’t adhere to the standards. The same argument is made for regulation in markets like the US, but essentially the cost has to be weighed up because in the short-term revenue and competitiveness is taking a hit.

Is there a better way?

So given the cost of implementation, the loss of competitiveness, the fact that Basel III adds inordinately to the complexity of the institution from an organizational structure and process perspective, why don’t we see more of the big banks complaining? Probably because purely the cost of implementing Basel III is prohibitive and it is likely to produce more consolidation of the sector as they snap up banks who can’t afford to comply. There has to be a better way though…

The Basel accords team needs to encourage the reduction of complexity in the system, which in itself creates risk. Rather than enforce new reporting or analysis elements for existing processes, what I’d like to see is a real revolution in process redesign. Let’s look at ways of taking the complexity out of the system, reducing risk by reducing handling, process and silos.


What The Beatles' success on iTunes means for Banking…

The Beatles are arguably one of the most successful bands of all time, but their foray into the digital music space has long been frustrated. In their first week on the iTunes store, however, the Beatles amassed a staggering 2 million individual song downloads and over 450,000 in albums sales. Not bad for a band who stopped recording music 30 years before the iPod was even invented. Their success is evidence of something else entirely, and it should terrify banks mired in physical methods of banking.

Apple versus The Beatles (also Apple)

The fact that The Beatles held out on launching their ‘content’ into the digital space for so long is sadly typical of many very traditional businesses confronted with changing modality and business models. The Beatles conflict intellectually with the digital space actually commenced as a legal battle between Apple Computers and Apple Corps (The Beatles Holding Company) that started more than 30 years ago in 1978. At that time The Beatles filed a lawsuit against Apple Computers for trademark infringement. In 1981 the initial case was settled for just $80,000. Conditions of the settlement were that the two “Apples” would not infringe on each other’s businesses, i.e. Apple Computers would not enter the music business, and Apple Corps would refrain from selling computers. Thus, in 1986 when Apple allowed users to record songs to their computers, it was perceived they were in breach of that agreement. The legal jostling continued until February 2007, when a reported settlement of some $500 million was reached over the trademark dispute in favor of Apple Corps.

Modality shift kills physical music distribution

Confronted with the digital age most of the recording industry bristled. They saw changing modality, a shift to digital music as a threat to their entrenched distribution channels. Rather than embrace digital distribution the likes of the RIAA, when confronted with innovation in their sector, lashed out with lawsuit after lawsuit, starting with the famous case against Napster. The RIAA’s strategy was built on the sole premise of trying to prevent people from using file sharing networks so their existing distribution networks could be propped up indefinitely, and they celebrated Napster’s decline into bankruptcy as a sign of success for this strategy.

Clearly most saw the writing on the wall, but rather than change, the RIAA and the industry as a whole buried their head in the sand, hoping to limp along till change was absolutely inevitable, or worse thinking that they were immune to change. By all accounts, the RIAA was woefully unsuccessful in this strategy. Today, new artists live or die based on their ability to move product in the digital space, and The Beatles move at long last into the digital space singles that the last bastions of support for traditional, physical music distribution is crumbling. In fact, physical “record” sales peaked in 1999 at $14.65 Bn. By 2007 Physical sales of music content were already less than in 1993 having reduced to around $10 Bn, and by then end of 2010 it is expected digital music sales will finally overtake physical sales all together. Clearly the sector was in massive trouble with its decision to resist digital sales and the hundreds of millions spent by the RIAA on legal bills were largely a complete and utter waste of money. Those precious funds should have instead been put into revitalizing the industry digitally. The RIAAs actions in this light were reprehensible.

The RIAAs attempt to kill off digital distribution failed dismally

It’s not just ‘physical’ music that’s at threat

Others have faced similar battles in recent times, including Blockbuster who filled for Chapter 11 in September of this year, clearly signaling the near death of physical distribution of DVDs. Encyclopedia Britannica faced the same type of troubles when Microsoft introduced Encarta to show Windows’ multimedia capability in the mid-90s. This almost spelled the end of Britannica’s 300 year old business overnight.

What is under attack here is not DVDs, it’s not The Beatles, RIAA, Books or CDs and vinyl – what is under attack is Physical Distribution of goods that can easily be digitized. In that sense, the bank sector is in massive trouble because almost everything a bank does can be digitized.

Much of what our banking experience today means is wrapped up in the banking sector’s love of physical distribution. The centre of retail banking from an organization structure perspective in most cases remains the branch, which started life arguably as a physical distribution point for cash. Branch P&Ls exceed ‘digital’ by a factor of 50-100 times in most retail banks of today – an inequity that speaks volumes to ghastly outmoded thinking in bank boardrooms. Cash, Cheques, Plastic Cards, Branches themselves are all inevitable victims of this modality shift.

The Financial Times reported last week the following sentiment in the banking sector:

Banks across the UK, Europe and the US are now bringing service centres back into their local markets and investing heavily in their branch networks. More significantly, many are attempting to restore their battered reputations by putting customer satisfaction at the heart of their business
Financial Times, November 17, 2010

Physical banking is dead (at best dying)

This strategy is massively flawed. While improvements in customer service should be applauded, the fact is, based on distribution metrics, take up of mobile banking, internet banking, mobile payments, and other such indicators, the investment should be going into improving customer journeys, experience and service in the digital space. Most banks need to increase their investment in the digital space ten fold in the next 3 years at a minimum.

Like The Beatles, most banks when threatened with this modality shift, will find it extremely uncomfortable. The reality is, though, if they embrace the change revenues will follow. To give you some indication of the vast gap between shifting modality and the reality of bank distribution strategy, most banks still classify Internet Banking as a ‘transactional platform’ for saving distribution costs. For most customers today, though, they are 30-50 times more likely to visit your bank by logging in to Internet or Mobile Banking than visiting a physical branch. The problem with bank strategy in this respect is, if you come to a branch a core strategy is to try to sell you a new product. Today, most banks don’t sell anything through Internet Banking. If they did, most banks would be shocked to find out that they’d be actually selling more product online than through their entire branch network today.

It’s not branches that is under threat today – it is physical distribution. Banks can take the music industry approach and stick their head in the sand until things are absolutely inevitable, or they can adapt.


The perfect storm to bring an end to cash

I’ve been at the E-Money, Cards and Payments conference in Moscow today. Coming off the back of SIBOS it is quite interesting to have a discussion not just about payments, but around modality and the emergence of strong mobile payments methodologies and practices. We already know that checks/cheques are in terminal decline, but when you bring up the ‘end of cash’ this gets a great deal of emotive responses or general disbelief that this is possible. It is becoming quite clear, however, that regardless of the emotion and habitual systemic behavior there is an number of issues that are combining to create a critical decision point for governments, regulators and the banking community to get actively behind the removal of cash from the system. Here are some highlights:

Net Social Cost

Cash costs society comparatively significantly more than alternative payments methods such as debit cards. At the conference Leo van Hove, Associate Professor of Economics at the Free University of Brussels, presented data showing that in Belgium 10.24 Euro is the threshold where cash starts to lose it’s efficiency due to marginal costs, and in Netherlands this is about 11 Euro. In a discussions from the floor between Leo and Dave Birch (@dgwbirch), however, the two identified additional social costs beyond distribution, including money laundering, gambling, crime, etc that make physical money a net negative in the social impact picture under most scenarios.

Base Materials and Production

An average US 1 Penny coin costs 1.67 cents to manufacture, and the Dime (5 cent piece) costs 7.7 cents to manufacture. So it is clear that coins in general are becoming untenable as raw materials costs for copper, silver, gold, etc climb yet further. A great quote from SIBOS of a few weeks ago from Carol Realini (@carolrealini) was that projecting the future need for cash into the Indian economy would take more paper than can be produced from all the trees in the world if based on real physical currency. With an increasing focus on carbon cost of production, then surely cash itself is a massively expensive proposition for society and is no longer an efficient mechanism for governments. Banks may be holding on to cash because their retail businesses are still largely based on physical cash distribution, but the reality is this is a false economy for society as a whole and is certainly not responsible as we move towards a greener future.

Not mathematically efficient

Ok, so this one I can’t put claim to. This was the discussion going on virtually between Leo van Hove and Dave Birch today. Dave points to a recent Blog Post from the Freakonomics gang that suggests the correct denominations for coins should be 3-cents, 11-cents and 37-cents based on correlations between pricing, spend, coin production, distribution, etc. Alan Burdick puts this combination slightly differently when he supposes that we need 5-cent, 18-cent and half-dollar combination.

By one estimate, $10.5 billion in coins just sits around in people’s homes gathering dust…
Alan Burdick, Discover – The Physics of Pocket Change

Mobile Payments and contactless Debit Cards

There’s been a lot of chatter about mobile payments, the NFC integrated iPhone, M-PESA, G-Cash, PayPal and so forth in the blogosphere of late. It is clear there is a lot of anticipation of this potential, but there remains some challenges. Ubiquity is going to be challenging because just like with physical cash and currency, competing standards may actual work against adoption. Interoperability between payments networks, between e-Cash and physical cash, etc will be a challenge too.

Nobuhiko Sugiura, a Special Research Fellow of Japan’s Financial Services Authority, and the Associate Dean of Chuo University Business School also presented at the e-Money conference in Moscow. He highlighted the fact that one the regulators got behind e-Money that it’s success was rapid. Just in the last 3 years use of e-Money has increased 300% now to be one of the most frequented personal payment mechanisms in Japan. In fact, one third of Japanese, according to Sugiura-san are already e-Money users. He cited some other great drivers behind e-Money’s success in Japan, which translate as equally well to countries outside of Japan, namely:

  • Japanese banks have no interest in micro-payments because of the relatively cost base
  • Convenience stores favor e-Money so that they can reduce their cash float
  • The unwritten law in Japan is that refunds are “prohibited in principle”, because the Japanese governments want to replace Physical cash with e-Money as quickly as possible

In the UK, 43 per cent of retail payments are done by debit card and 23 per cent by credit card. Cash still makes up 32 per cent of these payments, but as a percentage of the whole, it continues to reduce. This is a trend throughout the EU and much of the Western world.

Conclusion

Given all of the above, it must just be pure momentum in the system as to why we are still using cash. In terms of cries from industry that “cash is back” it would appear that this sentiment should be discouraged at all costs. If you want to encourage savings then promote debit card and e-Money usage, but physical cash is bad for the system all round.

I say – Bring on the iPhone 6!


Will Facebook kill the US Dollar?

According to current statistics, Facebook has more than 500 million ACTIVE users, 50% of whom use Facebook everyday, 200 million of these users interact via mobile daily, and around half of the Top sites in the world are integrated with Facebook. PayPal recently announced integration of micropayments into Facebook’s platform. Facebook also announced that you will shortly be able to buy Facebook Credits from Walmart and BestBuy.

In the midst of all of this is a rapidly spiraling US dollar, with increasing competition from the Yen, Euro and hedge currencies like the AUD. The Fed’s QE2 moves tend to bring even more uncertainty to the USD in the near future. With questions over the future of the Yuan/RMB and the huge foreign reserves of USD in China, the uncertainty over the USD as a currency for the longer-term is simply building.

Putting these facts together seems innocuous, but with a bit of imagination the future of Facebook Credits (or another such virtual currency) could change the way we think about, value and utilize currency globally. The fact is, today physical cash carries less and less value. Recently at the SIBOS Innotribe sessions we discussed “The Future of Money” where Venessa Miemis presented a compelling video that really triggers thinking around how currency will be defined as mobility, behavior, virtual trade, transparency and interactions start to impact.

Virtual Money is not new

AmazonPayments, both a type of digital currency and payment platform, has put Amazon into the online and mobile payments fray. Like PayPal®, Alibaba’s AliPay, Tencent’s QQ coins, Second Life’s Linden dollars, all these virtual currency players are trying to export their currency or payments platforms to the mobile sphere as a means of transferring money or buying goods, services and gifts securely online, or on the go.

“The so-called ‘QQ’ coin—issued by Tencent, China’s largest instant-messaging service provider—has become so popular that the country’s central bank is worried that it could affect the value of the Yuan. Li Chao, spokesman and director of the General Office of the People’s Bank of China, has expressed his concern in the Chinese media and announced that the central bank will draft regulations next year governing virtual transactions. Public prosecutor Yang Tao issued this warning: ‘The QQ coin is challenging the status of the renminbi [yuan] as the only legitimate currency in China.’ ” – AsiaTimes Online, December 5, 2008

QQ currency speculators in China even opened up a Forex trade in the currency, as had already happened with Linden dollars – the currency that powers purchases in the Second Life virtual world. In China, the players in the currency game have gone one step further, with online vendors hiring professionals to play online games earning QQ coins as currency. Some even use hackers and other methods to steal the coins. They then sell the virtual currency below its offi cial value, at a rate of 0.4–0.8 yuan per coin. The Chinese government initially tried placing capital controls on QQ coins, but that just led to scarcity, driving up their real world value by 70 per cent in a matter of weeks.

The impact of a tradable virtual currency, with 500 million users

Let me give you two possible scenarios of where Facebook Credits could go that would ultimately result in the demise of real-world currencies weakened by plays such as QE2. Ultimately strong currencies are built on the credibility of that currency to be traded, so in the coming digital sphere, without a ‘gold’ standard, consumers could vote with their thumbs.

Scenario 1
Facebook Credit announces a tie up with Apple for the iPhone 5 (NFC enabled) where you can use your Facebook credits for real-world purchases at the Point-of-Sale at participating retailers like WalMart, Best Buy, etc. Suddenly those Facebook Credit gift vouchers seem a lot more valuable.

Scenario 2
Facebook, PayPal, Western Union and NCR tie-up to announce a global network of cash-in/cash-out points for Facebook Credits for Person-to-Person payments. You can now send Facebook Credits anywhere in the world and cash them out at a participating physical location or at a local ATM in your home currency.

Fictional?

Maybe, but either one of these scenarios, or something close to these are entirely possible with the consumer power that Facebook has with 500 million ‘friends’ behind them. Turning that into a credible, virtual currency that bridges the gaps between mobile, online and the real-world is not at all far fetched.

What does it mean for the USD and global economies?

Quite possibly we are looking at a global reset of how we consider the value of currency. This is at least as significant as Nixon’s decision to move away from the ‘gold standard’, announced on August 15th, 1971. Nixon claimed speculators had too much of a role in determining the value of the US dollar and that was the reason for the move away from the hard commodity link to Gold.

“The strength of a nation’s currency is based on the strength of that nation’s economy” – President Nixon, August 15, 1971

It is possible, that the economy that Facebook, off the back of mobile-enabled P2P payments or a common virtual currency for the online world, could create a virtual economy second to none.

I could be wrong – but The Future of Money has to be considered in the light of the impact of digital influence. Country boundaries and the value of a local note largely lose their import if a virtual currency can be credibly tradable across different modalities and that translates to the ability to trade goods and services in the real world. 500 million Facebook users could tip the balance here…


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