The Price of Everything

Remember the end of It’s a Wonderful Life? The entire town came together to help Jimmy Stewart’s Building and Loan because he was a keystone of the community.

My town’s banker, Walter Deutsch (Unity Bank):

This mythical age of banking may have never truly existed, but we seem to be moving further away. As banking moves online and credit scoring replaces reputation, banks sacrifice the human touch.

As community dissolves, banks lose. We are still highly trusted, but there are fewer places to apply that trust. Read more »

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Amazon recently announced Elastic Compute Cloud - a service that allows outsiders to rent computing power from Amazon’s huge server farms. 

BNP just signed a deal with IBM to share computing capacity.  Bankervision links the dots to show where this is going:

Let’s assume that BNP does inter-day, processing only, and that the run takes all night. Therefore they use that capacity for 12 hours. In other words, the facility costs them $3000 a day. There are 52 weeks in a year, but markets are open for only 5 days of each week. Ignoring holidays, we have to do 260 runs a year, for an  annual cost of $780,000. Over three years, that would amount to the grand sum of $2.34 million dollars. For 2500 machines available on demand.

Something like 90% of Amazon’s hardware capacity is designed for the Christmas crunch and sits idle the rest of the time.  Their marginal costs in renting this capacity out are near zero.  They are actively looking for customers (like banks) to rent this capacity cheap.

Banks will have to work out security implications, but it’s well worth it.  Computing in the Amazon cloud allows several million in savings beyond the already terrific IBM/BNP deal.

Computing in the cloud will produce major cost savings/hardware improvements for the banks that take advantage.  Ultimately, there could be a few big competitors facing the same costs, concerns, and prices.  My guess: it won’t take long for IBM’s initial stab to grow to many more jointly-shared servers.  And ultimately, IBM could charge Amazon for Christmas cloud coverage.

A big potential win for banks and even good green marketing.  In an era where Google consumes more power than aluminum smelters, using computer hardware more efficiently translates into reduced dependency on foreign oil.

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Microsoft is famous for “dogfooding” their software - they use their own software internally.  This demonstrates Microsoft’s confidence in their own products.  Even more important, dogfooding makes sure the software teams experience the same pain as real customers. 

We dogfood here.  And banks are starting to do the same - or at least the hedge funds that own them.  Tom Brown and the rest of Second Curve Capital recently explored all of the bank branches in their Manhattan neighborhood.  From the NYT: Read more »

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Sting still pulls in $2,000/day in royalties for Every Breath You Take. 

Pretty cool, but nothing like singing about central bankers.  From Columbia Business School, economics with an eighth note pulse.  Schoolhouse Rock, eat your heart out.

Bankers: Pop this one in before your next ALCO meeting.  All that jaw-jaw about forward rates, consumer demand drying up, and asset-sensitivity goes down a little smoother with a catchy tune.

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BTN reports a new service for bank customers: placing shredders in the branch.

What’s the connection?

Banks sell trust and security.  Customers want to buy peace of mind - and one of their deepest financial fears is identity theft.

Leave aside the profit implications of offering this product for fee.  The service deepens the relationship with your customer exactly along your key branding as a bank. 

Shredding is similar to placing a coin counter in your lobby.  Take care of your customers’ financial headaches and they will stay loyal. 

Of course, only offer services that enhance your key value proposition - no lottery tickets, hedge funds, or payday loans, please.

Bankers: You can lower your optimal rates by changing rate sensitivities.  Deepen your bonds with the customer and use your retail presence to your advantage.

Update: Shredding is spreading to banks across the country.  From American Banker ($) (hat tip: John McCaffery):

National Penn Bank has had such good attendance at its shredding days that it is considering handing out coupons for special bank offers at next year’s events, said Linda C. Hill, director of retail marketing for the subsidiary of the $5.2 billion-asset National Penn Bancshares Inc. in Boyertown, Pa.

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Yes, it turns out our China trade deficits are partly due to those darned bankers.  America’s financial system may be working a little too efficiently. 

My econ classes taught money flows from developed economies to build up evolving countries.  The Brits and Dutch invested lots of money in the Colonies because that’s where the returns were.  Investment (factories, tools, etc.) is more effective in places that don’t already have a lot of money. Read more »

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From the NYT, Diner Beware: Turisti Pay More in Roman Restaurants

It might be an extra 30 cents for an espresso, or a $5 tithe tacked onto a bottle of wine. It may even mean the substitution of lower grade ingredients. But the practice of charging tourists more does exist and is committed daily, even hourly. If executed properly, the turista will be none the wiser.

“You think you are being taken care of,” said Christian Boyle, a Londoner who has spent some months in Rome. Soon after arriving, she and some friends displayed fatal naïveté, when they were not sure what to order at a restaurant just off the Piazza del Popolo. “We couldn’t decide,’’ she said, “so the waiter said he would bring us some things to try.’’

“One thing kept arriving after another,” she said. Things were fine until “he charged us full price for all these little dishes that we thought we were just trying.”

People hate getting cheated.  Evolutionary psychologist Leda Cosmides built pretty cool experiments to demonstrate how good we are at finding cheaters.  Turns out, the human brain specifically evolved the ability to detect cheaters.

Which brings us to price gouging.

Read more »

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Zopa is a shot across the bow of traditional banking, much like Commerce Bank.  The effects will take years to play out, but the best banks will take the opportunity to hone their competitive edge right now.

Zopa is a classic blue ocean strategy.  It will likely create brand new customers in areas like personal loans rather than pull them from banks.  But zopa may also hit banks in their sweet spot of low-cost deposits.

Banks should not compete directly against zopa on price.  Banks have a different cost structure - and a different product.  But they should think about lessons from zopa - as well as areas where traditional banks can excel. Read more »

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We saw in part one that peer-to-peer banking has a lot going for it.  But there are some strong negatives too. Read more »

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A few months ago, a venture capitalist asked my opinion about Zopa.com - a new financial startup. I told them I thought they were not much of a threat to banks. The VC went on to fund the company, which goes to show how little I know. Read more »

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