Several of the ideas floating around in their own orbits last year look set to link up in 2017: the cashless society, universal basic income, the rise of the robots and the digital (gig) economy. All of these topics are being chewed over at dinners in Davos this week — though the assembled great and good will doubtless be noting that broad swathes of the public, even in places like the US and the UK, have decided that the globalist agenda of the Davos tribe is not in their interest. The rise of the robots Let's start with the rise of automation, artificial intelligence, and the software revolution. It's a topic, after all, that has been central to human thinking all through the 20th century, and the dystopian future of robot domination has been broadly explored in films from Metropolis (1927) through to Terminator (1984). Robot-human interaction has also featured in recent movies such as Robot and Frank , about a retiree who reluctantly accepts a robot to help him get around ("That thing's going to murder me in my sleep"), and Ex Machina , a movie which frightens the viewer through its canny look at the sort of opt-in surveillance that we all participate in every time we log on to a computer. Robot and Frank is a fairly benevolent look at the robot future, and is more sympathetic to what we can call a Japanese approach. For a fascinating glimpse into the relationships of humans and robots in that country, take a look at the documentary The Human Robot . For all the anxiety about mass immigration generated by Donald Trump's campaign and many Brexit supporters, few people to date have been complaining about the hundreds of robots imported from places such as China and Japan that have been taking a lot more jobs than human immigrants. Yet public opinion is beginning to take seriously the robot threat. The Rise of the Robots by futurist Martin Ford was the FT's book of the year in 2015, tackling the themes of automation and artificial intelligence. The book concludes that there's no stopping this trend, and that the best response to unstoppable automation worker-displacement is Universal Basic Income. The claim that all of these old jobs will be replaced by new jobs for robot maintenance workers and content curators is implausible. It's worth remembering that there's two distinct classes of robots. We're used to physical robots, whether that's a Terminator or a robot busily attaching car doors in an automobile plant. It's the new wave of software robots replacing white-collar jobs that's generating anxiety among professionals. The gig economy The rise of the freelance economy has been a feature of the last decade, and the tech press is full of writers marvelling at taxi-app Uber. Otherwise sober bank executives have been arguing for the last two years that they want to be more like the multi-billion dollar-losing transport business that epitomises digital disruption and the gig economy. But, for many people, automation and the digital disruption celebrated by the tech elite means losing your job — while being told that the new 'gig economy' will leave them lots of free time to, for instance, stay healthy and earn money by driving an Uber or delivering dinner on a bicycle to one of those people lucky to still work at a bank. But workers are fighting back, realising that most societies (with notable exceptions such as Germany) are not well set up to offer pensions or health insurance to the self-employed. While Uber and Airbnb use regulatory arbitrage to gain custom, workers are pushing back, with the courts in the UK and Denmark most recently taking issue with Uber's definition of itself as a digital platform. So, how can governments deal with a future where we're likely to have more and more freelance and self-employed people, along with the ranks of unemployed? How about a guaranteed income for all? Universal Basic Income Although promoted lately as a left-wing concept, the idea of automatic income payment to all can be traced back to Milton Friedman's Capitalism and Freedom , where it took the form of a "negative income tax". The notion has come of age recently, with Switzerland running (but widely rejecting) a referendum on the concept last summer and Finland proceeding with an experimental pilot. As Euronews reports: "Finland will be the first to conduct a UBI experiment on such a scale. The two-year pilot scheme will provide 2,000 25- to 58-year-old, unemployed Finnish citizens with a monthly basic income of €560 replacing their other benefits. They will continue to receive the UBI even if they find work." Some people are asking awkward questions, such as 'where is this money going to come from', but their number is small. Clearly it's going to have to come from somewhere, and most likely that means cutting existing public services. As online magazine FurtherField notes, Friedman envisaged that such a payment would allow the elimination of social welfare programmes and returning to 19th century-style provision of welfare by charities and philanthropists. The article quotes libertarian Charles Murray: "The first rule is that the basic guaranteed income has to replace everything else — it's not an add-on. So there's no more food stamps; there's no more Medicaid; you just go down the whole list. None of that's left. The government gives money; other human needs are dealt with by other human beings in the neighbourhood, in the community, in the organisations. I think that's great." A country with a universal basic income is likely to fiercely resist immigration, because word will travel pretty fast if one country starts handing out money to every resident. Perhaps the disappearance of state services would discourage such migrants? If that doesn't work, it's likely that any universal basic income would be distributed solely as digital money. Welcome to the cashless society. Going cashless It's no surprise that Harvard University tends to produce ideas that rapidly enter mainstream conversations, and last year the primary example was Prof. Kenneth Rogoff's book The Curse of Cash . For most people, having cash is a kind of blessing, so Rogoff's title is throwing off all kinds of signals. The curse, according to Rogoff, is that cash is used by criminals and drug smugglers, and ordinary people should have no need for large-denomination bills. Says who, one wonders? The Swiss pay for their cars with cash, and not in coins. Germans like to stash cash at home in the form of €500 notes. Cash allows privacy and discretion in spending. This proposal was taken seriously by Indian PM Narendra Modi, who announced that the replacement of old notes with new notes would filter out billions of illegally earned cash. (The population then returned almost the entire tranche of notes, largely disproving that theory.) Mr Modi disregarded Rogoff's suggestion that a transition to cashless society should take place over ten or fifteen years. There's much that's laudable about the Digital India initiative, but India simply doesn't have the infrastructure in place to leap into the digital age in the space of a few months. However, cashlessness is pretty much a fait accompli in some places, such as Sweden and Denmark, where the infrastructure for payments is solidly established, and almost every merchant will accept cards. Global private equity funds such as Bain and Advent are heavily invested in card processing, seeing large potential in emerging markets for a great rise in card payments. A cashless society will intersect with the big data giants and solidify the power of data-gathering behemoths Google and Facebook in the West and their counterparts to the East. Will all privacy go out the window with cashless societies? That notion is at the heart of the current battle between the US and the EU over data privacy: Brussels is forcing Silicon Valley to hold data on European citizens on servers physically located in Europe. In an age of digital convergence, the sovereignty of nations takes on additional importance. The rejection of globalisation signalled by Brexit and the Trump Presidency is telling us this also. Beware of those who insist that software will eat everything, including borders.
Handelsbanken is a great firm, which nonetheless confounds its Nordic competitors . It's a dinosaur whose only customers are old people, mutters one competitor; it's so digitally backwards that customers are offered swipe cards, says another, shaking his head. Decentralised? All decisions come from Stockholm, opines a third. A fourth critic suggests that new Basel III rules on capital floors might hit Handelsbanken hard. Yet those same competitors cannot deny several facts about Handelsbanken. It has the best customer satisfaction rating among Nordic banks and has delivered consistently better-than-average returns for forty-four years. It has a market position that many envy but few could emulate, or even begin to emulate. It's had precisely the same strategy for over 45 years, so it doesn't have a head of strategy. What would he or she do but interfere with success? And, as digital banking becomes — or so we're told — "essential" to every bank and financial institution, the question is this: how will new and long-established banking businesses differentiate themselves once they've all disappeared onto our mobile phones? Is there something that makes Handelsbanken's branches special? In December 2016, Lafferty News travelled to Stockholm to speak to Handelsbanken's newly installed CEO Anders Bouvin as part of a series of interviews we are conducting with the CEOs of banks that rated highly in the Lafferty Bank Quality Ratings project. (Handelsbanken was one of 11 banks to earn four stars out of five in our survey of 100 European banks.) Our analysts were particularly impressed by Handelsbanken's strategy and culture — both easily articulated and understood, even by lay people. Branch ambitions remain strong at Handelsbanken Handelsbanken wants to have "the world's best branch network" — an ambition that most banks have long abandoned. And, despite having a miniscule marketing spend, and relying mostly on word of mouth to gain new customers, Handelsbanken does have unique selling points. Take this passage from English business author Mark Ballett, reflecting on the name Wallander . (The name has become popularised in the UK through the sour Swedish TV character played by Kenneth Branagh.) Ballett's piece is from 2013, and was inspired by meeting the new local branch manager at a networking event. The manager spoke about Handelsbanken's cherished principle of decentralisation. "As merely a casual observer," writes Ballett, "I'm certainly no banking expert, but Handelsbanken's wonderfully evocative and succinct definition of its branches' market reach, is, like all great marketing communications, just a reflection of a more profound strategic idea, that of decentralisation. For that we have Mr Wallander to thank. No, not the sullen detective, but a gentleman called Jan Wallander who became Handelsbanken's CEO in the early 1970s and began to build the decentralised organisation that it is today: one that values decentralisation and profitability rather than volume growth. "Oh, what a different world we would live in today if the rest of the banking community were so wise and they hadn't gone off chasing scale in order to pump up their egos, bonuses, and pension pots, in the rather cavalier way it would seem they did, following the "flawed business model" of HBOS and many others. Of course, these business models are only considered to be "flawed" now, not at the time when the economy benefited greatly, for a while, from the export strength of this industry apparently led by magicians. Sadly (for many of us!), these financial sorcerers were naked and no one, not even the regulator, had the courage to say it at the time, though they are making a meal of it now." So, what does Handelsbanken do which so vexes its competitors? "Sometimes we take their customers," says Anders Bouvin. "We picked up customers from other banks during the financial crisis. I would say that's one of the outcomes of our devolved leadership model. All credit decisions are made locally, and authority and responsibility rests with local managers. So during the boom, these managers typically knew their local market well. They thought twice if their customers were too stretched. "So our branch managers were aware of the local economies and cut back on lending as the market heated up. When other banks ran out of money, some of their customers came to us because we were still in business." What does he mean when he speaks about 'devolved leadership'? "Well, 'devolved' meaning 'let go of power'", he says. "Instead we empower decision-making within the organisation. Then you get strong buy-in from people in the organisation. They don't go to work to meet targets that somebody else has set, but targets that they have set themselves. In other words, when don't have many middle managers telling people what to do, we get a strong sense of ownership." Mr Bouvin, who was in the UK for several years as the bank grew its UK branch network, believes that the bank attracts entrepreneurial characters to its leadership positions — and especially people who want that opportunity in their own territory. Promoting enterpreneurial managers "Handelsbanken is great for people who have an ambition to run their own business," he says. "Profits and losses are the responsibility of the local branch. We have local people running local branches and they have discretion to make the vast majority of decisions. So the local managers are focused on doing what is right locally, and the board — when looking at particularly significant credits — can only approve decisions that are already approved locally. That way we're not enticing managers to cut corners. The goal is not product sales but satisfied customers." Local branches keep a keen eye on their cost/income ratios, he explains. "At branch level, cost/income ratio is a more suitable ratio than RoE. If as a branch manager you believe you're in an area where you can't grow income further, such as a small town where you already have a large market share, then you can focus instead on managing costs to improve your ratio and therefore your contribution to group profitability." Income and costs stay in the branch, he says. "There's a price tag on every product and service. As branch manager, I am debited the true cost of every service I provide to my customer. This enables me to price the service wisely in each case, knowing how much profit — or indeed loss — I have chosen to make to satisfy this customer's needs. The internal market I describe provides branches and central departments with clear traceability and accountability." Ultimately, all central costs, whether product-related or not, are debited to the branches. With regulators looking closely at banks' risk weighting and capital ratios, banks with conservative funding positions appear better prepared for higher equity/capital ratios. "We don't look at capital ratios from a regulatory perspective, or seek to optimise from a minimal level," says Mr Bouvin. "We have always believed it is prudent to maintain ratios on the high side, especially during economically uncertain times, and our reputation for financial strength is one of the reasons for our commercial success. We are a stable bank, with stable finances, and we believe that consistency is important, just as our customers do." "We have a very strong culture...these values are based on a humanistic view" With culture in banking looming as a major issue during 2016, particularly when it comes to the hard-selling culture that tripped up Wells Fargo, can Mr Bouvin say that Handelsbanken has a specific culture? "We have a very strong culture," he says without hesitation. "We manage through values rather than financial targets. These values are based on a humanistic view. We believe that it's human nature to want to do a good job, and to do the right thing. If you encourage colleagues to make decisions within the areas that they overview, they will reward you by making sensible decisions and their decisions will be much wiser than hierarchical decisions." It's a point he returns to more than once during the interview, stressing that Handelsbanken's "humanistic values" resonate throughout the bank. "But it's not anarchy in Handelsbanken," he stresses. "We keep a close eye on things throughout the organisation, to see that people stick within our framework of values. Regional head offices don't tell their branches what to do but they do keep a close eye on them, and will interact with them to provide guidance if there are any changes needed. We need a open and cooperative organisation based on mutual trust and respect and a shared goal." What about the charge made by some competitors that Handelsbanken is behind the curve when it comes to digital banking? "I've just returned from visiting some of our branches in Oslo, and there I find that the branches are driving products and services, and they take very strong ownership," he replies. "So I find the question about digital a bit odd. The vast majority of our transactions are digital but our customers say they want both: they also want us to keep the branches." "We provide digital services to whatever extent our customers want them, and we build them to reinforce the local relationship that make our customers the most satisfied. We don't have anyone at head office who tells customers 'you have to go digital'. And for costs in head office, the branches will have to pay, so the demands we receive have been carefully considered!" Anyone can start a fintech business, he says. "You just need a business licence, capital and technology. But if you only compete that way — digitally — then how can you survive year after year? We strive for the world's best branch network. We believe that local relationships will remain in demand. And who are we at head office to say what branches will do?" As the big wheel turns in global affairs, voters appear to be increasingly suspicious of centralisation and globalisation as a cure for all ills. Handelsbanken's dogged localism — which has looked anachronistic for a couple of decades — now seems increasingly in tune with the times.
The payments industry needs to keep a close eye on Amazon as the firm continues to build revenue, rearranging industries at will as it powers towards dominance. Say what you like about Amazon, but one cannot accuse them of not being innovative. Now it is moving into the bricks-and-mortar grocery business, with an audacious plan to drop the actual checkout. Shops without checkouts: of all the strange stories in 2016, this one turns out not to be fake. In a breathtaking demonstration of its confidence in Internet of Things technology, Amazon announced last month that checkoutless stores, currently in testing with employees, will be coming to cities in the United States later in 2017. Readers may recall a brief flurry in the news about this product, called Amazon Go, before the holidays, in the course of which the point was made that it might be good news for poorer areas where staffing and securing supermarkets can be a problem. The social ramifications are not part of our purview, but it is certainly a pity for those lonely souls who depend upon chit-chat with a living cashier as a social highlight of their day. However, from a payments industry standpoint, it is curious to imagine a store that is altogether lacking a physical POS. From cash registers to QR code readers, the drive for a frictionless experience has always been premised on the existence of an actual, physical Point of Sale, replete with paper triplicates or contactless scanners. Now that very premise itself is being done away with. Amazon's Dash buttons are another example of the company's originality when it comes to payments thinking and its continuous drive to fit into consumers' everyday lives in as frictionless a manner as possible. In fact, the Dash Button, a branded device allowing a quick refill of household staples such as detergent and paper towels, is a complementary product to the Amazon Go store, the one picking up where the other leaves off and both together keeping consumer's homes stocked with household necessities. Although starting small, the combination spells a serious challenge to supermarket giants: consider the fact that the Borders bookstore chain, which once boasted some 600 outlets worldwide, crashed quickly once online competition made inroads into the mass market. Underneath the eye-catching peaks of Amazon Dash and Amazon Go this radically innovative company, which calls itself "peculiar", is laying the groundwork for another disruptive incursion: Global Supply Chain by Amazon, involving fleets of both drones and traditional aircraft, along with automated and semi-automated vehicles servicing massive new warehouses that could upend a business long dominated by the likes of UPS and FedEx. (But how suited for purpose is such an ideologically frictionless company, when it comes to dealing with human beings, innately given to frictional, indeed irrational, behaviour?) One recent innovation may have escaped even the most ardent Amazon-watcher: Amazon Pay Balance. This service — effectively a limited online wallet for Amazon India customers — was a quick response from the company to the ongoing challenge of Demonetisation, helping consumers to stay liquid as bank queues lengthen and cashflow becomes a problem. Not everything Amazon turns its mind to actually proves a hit. Consider, for example, the Kindle Fire Phone: the next big thing which has now slipped so far into the rear view mirror that it has been forgotten about. But this is the Silicon Valley spirit at its purest: try and (possibly) fail then learn from failure: iterate and execute. Guess who's coming to lunch? However, another feature of the Silicon Valley mindset should give pause: the continual drive for a monopolistic position. Jeff Bezos, the founder and brains behind Amazon, has proven himself willing to forgo profits in order to build market share, ruthlessly rearranging several industry ecosystems. Unfortunately the West's current political turn towards autocracy chimes with that mindset. Consumers may have struggled with the plethora of choice that globalisation and technology initially brought: however that does not mean that they just want a single choice. Amazon too, despite its power, is subject to the burgeoning disruptions wrought by cyberhackers: along with Twitter, the site was knocked offline during the massive denial of service attack of last October that saw much of the US internet taken down. Amazon, lest it be forgotten, actually hosts a large chunk of the net, including Netflix and Adobe. If Amazon catches a cold, we all end up in intensive care. "We're a company of pioneers," says the Amazon website. "It's our job to make bold bets, and we get our energy from inventing on behalf of customers. Success is measured against the possible, not the probable." Now, as reported in this morning's Daily Briefing from Lafferty News , Amazon has just offered Prime members — ie, half of American households — a free credit card with a five percent cashback offer on items purchased on Amazon.com. The payments industry has always thrived on a complex mix of cooperation and competition involving players large and small, but how will it cope if a monolith, keen to eat everyone's lunch and every other lunch ever after, moves to insert itself at the heart of the sector? That move has yet to happen but it is worth considering — and preparing for.
Next month, Lafferty will publish its next thought leadership report, titled Payments Power . Author Peter Kinahan argues passionately that banks must hold on to and develop their payments infrastructures rather than let fintech players run away with this business. Why the passion? Today's crop of news stories makes it plain. For a start, the 'Bank of Tech' is coming . As...MORE
In Sweden, you can Swish; in Denmark you had Swipp; and now banks in Norway have plumped for Vipps. Nordic banks are battling to hold on to the payments infrastructure by developing successful mobile payments systems — echoing the struggle taking place in Australia between the banks, Apple Pay, and some social media players dabbling in payments. In Scandinavia, two banks stand out. Norway's DNB developed a payments app in 2015 called Vipps, which is now http://finance.y...MORE
Bloomberg kicks off the week in fine style this morning in a report that puts Apple, conspiracy theories and banking in the same sentence. The Australian banks have now abandoned their attempt to work in concert to block Apple Pay. In their final submission to the country's competition regulator, the banks said that they will https://www.bloomberg.com/news/articles/2017-02-12/apple-pay-dispute-about-tech-access-not-fees-aussie-banks-say.11(cooperate with Apple as long as the tech company...MORE
"That chip on your credit card isn't stopping fraud after all," at least according to Fortune magazine. The report, citing Javelin Strategy & Research, notes that the success of chip and PIN in preventing in-store fraud has driven more financial crime online, with cybercriminals responsible for a 40 percent rise in card-not-present fraud . Fraud driven by online identity theft meanwhile rose 16 percent over the previous year, with total credit card fraud rising by $700 million...MORE
Brexit may result in 30,000 jobs and 17 percent or $1.9 trillion of British banking assets moving to other EU countries, according to a new study from Brussels think tank Bruegel. "At a minimum, it is expected that the new EU27-based entities will need to have autonomous boards, full senior management teams, senior account managers and traders, even though much of the...MORE
In blockchain news... Data released by the Reserve Bank of India shows a ten percent month-on-month drop in digital payments as Indians return to using cash . "The number of digital transactions fell from 1,027.7 million in December to 922.9 million in January," reported the Business Standard . Yet, within the data, some interesting patterns emerged;...MORE
Italy's UniCredit has reached an agreement with trade unions that will result in a "generational shift" at the global bank, replacing thousands of older staff with a younger generation. Finextra reports that the bank will achieve this through a voluntary redundancy programme, with the firm committing to hire 1,300 younger workers to implement broad digitalisation programmes. Italy's largest bank had already announced job losses in the region of 14,000 workers, along with...MORE
US president Donald Trump will today begin signing executive orders to start dismantling Dodd-Frank regulations . Among the provisions targeted are the Volcker Rule, which prevents banks from engaging in proprietary trading, and the Consumer Financial Protection Bureau. Steven Mnuchin, who spent 17 years at Goldman Sachs and is now the Treasury Secretary, has pledged to remove the Volcker Rule. According to former Goldman...MORE
The Lafferty News team has just returned to base following a sensational Lafferty Councils event in Cape Town last week, where we confirmed that there is indeed something special about South African banking . Regular followers of this publication will know that the country's banks have stood out in Lafferty Bank Quality Ratings, with Capitec and Barclays Africa at one point taking first and second place. So what's behind the allegations by supporters of President Zuma that banks are...MORE
Another day, another set of results from a Spanish bank: this time it is the turn of BBVA , which reported a rise of 32 percent net profit for the year just ended. The bank said it would have been more, but for refunds being paid on foot of missold mortgages. As is the case also with its domestic competitors, the European ruling on mortgage floor clauses is proving costly to obey. Far to the North, Sweden's...MORE
Yesterday on Lafferty News we reported on Italy's largest bank, UniCredit, struggling to right a balance sheet marred by bad loans, the kind of problem that has already seen Banca Monte dei Paschi di Siena taken into state hands. Daniele Nouy, charged with supervising the eurozone's largest banks, says of Italian banks that "very few have moved on impaired loans." In neighbouring Slovenia, bad loans shot up by 6.5 percent in November, and Greece, Cyprus and...MORE
Italian banks continue to struggle to keep their balance sheets healthy: now the biggest bank in Italy, UniCredit , has revealed that it will not be able to meet capital ratio requirements set by the European Central Bank. Fourth-quarter provisions of €12.2 billion for bad loans are being held as the reason; non-performing loans remain a problem more widely in the country. UniCredit...MORE