Author: Guillaume Lebleu

Banking-related panel proposals for 2009 SXSW Interactive Festival

I searched the SXSW interactive panel picker for “banking”, “money”, “finance”, “financial”, etc. Here are the panels I found:

  • Banking 2.0 – Algorithmically Fixing the Sub-Prime Mess (suggested by Christopher Hughes, PennyMac): Sub-prime debt may be causing the collapse of the worldwide economy. Speculators, investors, banks, mortgage brokers, honest home-owners have all been duped into believing that that the real estate market was a “sure thing”. Can a solution be found with a computing cluster, open source software, and a semi-complex algorithm? Yes.
  • Future of Money: Life after the Fed (suggested by Blake Stephenson, Flow): Ron Paul’s presidential campaign shone a light on the impossibility of central banks to “regulate” the economy and the inherent problems with fiat money (paper money). The internet is playing and will continue to play a critical role in the creation of the future of money. What is the future of money?
  • Mobile Ubiquitous Banking and the Future of Money (suggested by Kyle Outlaw, Avenue A | Razorfish): Nearly half the world’s population now has a mobile device and more than a thousand cell phones are being activated every minute. The ubiquity of mobile devices will make new services available to billions of people worldwide who have not had access to traditional banks or credit cards. In developing countries such as Kenya – where nearly 80% of the population is excluded from the formal financial sector – text messaging is being used to transfer money to friends and family living in other countries. Moreover, new forms of currency are being created – trading cell phone minutes for goods and services, for example. This panel will explore the challenges and opportunities as banks go mobile, and how the revolution in mobile financial services will change the way we think about money.
  • Strategies for Establishing Social Media in B2B Relationships (Brad Garland, The Garland Group | Banktastic.com) Social media in the consumer space is clearly talked about and prevalent. What is barely getting addressed is how these technologies can be implement in the business world and what are ways to do it successfully. This panel will explore that concept and how B2B relationships can be formed using these tools.

About SXSW:

SXSW Interactive Festival features five days of exciting panel content and amazing parties. Attracting digital creatives as well as visionary technology entrepreneurs, the event celebrates the best minds and the brightest personalities of emerging technology. Whether you are a hard-core geek, a dedicated content creator, a new media entrepreneur, or just someone who likes being around an extremely creative community, SXSW Interactive is for you!

iPhone Barcode reader now integrated with Safari/Dialer/Mail

Stefan Hafeneger has released the latest version of the Barcode application, and it is now available at the App Store.

The decoding now supports both DataMatrix and  QR code format, but more importantly it supports the extraction of the data for use with Safari (encoded data has to be a URL), Mail (encoded data has to be an email address) and Dialer (encoded data has to be a phone number). Here is a free online DataMatrix barcode generator to try for yourself.

The decoding actually does not seem to work as well as it did in the earlier version, but think of the possibilities opened by the ability to send to a barcode, open a barcode in Safari or dial a barcode…

Financial services pay the most for prospective customers’ attention

I was encouraged this WE to look into the cost-per-click of some financial services keywords in the U.S. using Google Adwords Keyword Tool.

As of the time of this writing:

  • “video cameras” costs you an estimated $3.14 per click,
  • “buy car” costs you $4.81,
  • “wireless” and related: ~$5.00,
  • “dsl” and related: ~$6.00
  • “real estate investments”: $5.47
  • “buy computer”: ~$8.

Now get this:

  • “buying mutual funds”: $12.66, “online stock trading: $18.06
  •  “best credit card deals”: $25.94, “balance transfer credit cards”, $18.23
  • “auto insurance quotes”: $34.58, “insurance quotes: “$29.77″
  • “high yield checking account”: $17.81, “checking account rates”: $20.44
  • “mortgage refinancing”: $32.58, “home equity loans: $23.74

I know this is a very superficial research study, but there seems to be a pattern here: financial services firms are paying significantly higher than firms from consumer sectors for prospective customers’ attention.

What can we learn from it? IMO the cost per click is a function of

  • profitability of the related service offered over the average customer relationship duration, and
  • likelihood that the prospective customer who has clicked will subsequently actually buy the service online,

then my quick conclusion is that there is probably good business opportunities in online comparison services for financial services products, as well as in new financial services that leverage the Web and social networks to be cheaper and mass-market. Peer to peer lending is probably one of them.

Developers: register your API key and start your own credit union/bank

Imagine if a bank or CU was exposing their system via a GData-like API, and was outsourcing innovation to third-parties, possibly creating a dedicated VC fund or prize to finance startups building applications on their API, managing innovation as a good old option portfolio, possibly acquiring only the most successful and profitable of these innovators.

Well, that’s not really possible yet, but it seems the idea is in the air, at least the API part. Here are some excerpt from the comments section of OpenSourceCU report on BarCampBankDallas. Here is a summary:

In the current economic context, some credit unions may be pushed to innovate to survive, and one effective tool would be to expose their API. Tim McAlpine says:

As far as the API goes, traditional FIs are the opposite of open source. Being open requires a start-up mentality. Unfortunately today’s old dogs are more interested in keeping the vault full and closed. […]

This API opportunity lies with the credit unions. If an open CU was backed into a corner to survive, they may think differently if we could get them to understand the concept and potential power of an API. This type of CU may be ripe for innovation and may just turn that API over. If they did, I bet the geek world would love to slide in the door and innovate on their behalf!

In a subsequent comment, Robbie Wright took this vision to the next level: what if someone was providing a platform for anyone to start their own financial institution, leaving the difficult paperwork part to the platform provider:

I believe a large opportunity exists in helping people start new CU’s. It is so tough from a regulatory perspective and from a capital perspective, that it always seems starting a CU is impossible. That is what we need to change. Aside from the open source core processor idea that has been kicked around for a while now, there exists the possibility to create an entirely new industry of the outsourced FI.

Now, what would this API would look like?

BarCampBankDallas, Whuffie and open Banking Web APIs

I wasn’t able to attend BankCampBankDallas, but Charlie over at Open Source CU wrote a nice report highlighting some of the concepts that were discussed during the camp:

  • Incorporating online reputation into financial reputation: “why can’t [FIs] hook into LinkedIn and view a person’s Recommendations and process that into their credit score”
  • Opening a FI’s APIs to the creativity of their customers and 3rd party developers: “could there ever be a day where an existing financial institution could let people hook into it and meaningfully tailor the infrastructure and product to their own needs?”

I think exploring the links between online reputation and financial reputation is very interesting indeed. I think leveraging public social data is a great way for banks to reduce the risk of payment default on people with less than perfect credit. I’ve talked about this before, particularly in the context of peer-to-peer lending: in the problem with banking innovation…, I explained how a loan where some of the people lending money are family members offers a different and more attractive risk profile than someone’s lending money from people they don’t know (and don’t care) about (especially when you have a huge securitization food chain). I had never thought that such data could eventually actually be part of the FICO score, and that I think that will take A LOT of time. Here is my guess at how things will evolve: I think that Experian-like services computing someone’s overall reputation (see how to compute someone’s whuffie) will develop, and as they become established brands, may end up as an input to FICO scores. Anyway, I do think FIs are fundamentally social intermediaries and can’t afford to ignore the publicly available social data. I think there is a great opportunity, especially at credit intermediaries whose goal is the benefit of the community (credit unions), to re-socialize credit relationships.

Regarding the opening of Banking Web APIs, I think also that this is a great way for FIs to smartsource innovation while ensuring the highest level of security standards. In the problem with banking innovation…, I suggested at the very end that one way to smartsource innovation could be to “do what Apple or Facebook do: expose some of this information via easy-to-use APIs in a way that is more secure than their startup competitors. Then, allocate a VC fund to fund startups using this API (which is equivalent to buy an option to invest more/buy out the most promising ventures later).”

So, I’m glad to see that these highlighted concepts are inline with some of my own ideas and probably with many other people. I really hope I can make it to the next BarCampBank near San Francisco.

How to compute someone’s Whuffie

Imagine yourself in a world where nanotechnology has made scarcity and the associated traditional form of money a thing of the past. In this world, the only currency is the goodwill that people give electronically to one another and everyone’s overall resulting reputation score is accessible by anyone in real-time. This reputation is Whuffie and the term and world was coined and imagined by Cory Doctorow in his sci-fi novel, Down and Out in the Magic Kingdom.

Fast rewind to present time. We are a world where people increasingly publish digitally their life i.e. are “life streaming”: they publish pictures, blog posts, twits, videos, wikis, etc. Other people subscribe to these life streams (RSS/friendfeed), give attention to the ones they find the most relevant and sometimes comment positively or negatively on these life stream items. These comments are themselves life streaming items and subject to views and positive/negative comments from others.

One thing is missing to get us closer to Cory’s vision: real-time computation of anyone’s Whuffie, the Web 2.0 equivalent of your FICO score. How do we compute it?

I have only found one blog post so far on the the problem of the so-called Whuffie algorithm, but I was not convinced by the arbitrary number of points won/lost for specific actions, and by the difficulty of implementing the tracking of some of these actions:

Trash talk somebody: -1000
For every conference you attend: +200 (Plus bonus +5 for each #tweet)

I know that Jeff Ward wrote that he was just posting for fun on this one, but since there seemed to be interest in the comments for an actual implementation, I decided tonight in BART to take a stab at what such algorithm would look like.

Here are the basic principles:

  • The algorithm should take into account how many positive/negative comments or citations your life stream items have got from other people, weighted by the Whuffie score of each of these people.
    • The use of the weight here is important as it allows to remove completely the arbitrary point amounts: for instance, instead of “For every conference you speak at: +10,000″, speaking at a conference would essentially be equivalent to posting a summary of your speaking engagement and have the conference organizers or the conference itself comment on it/cite you on their Web site, with the Whuffie value of the comment being a function of the Whuffie of the conference or conference organizers themselves.
    • The positive/negative nature of the comment would be determined via semantic analysis or microformats votelinks or voting nanoformats (vote:for:this article, +1/-1).
  • If the positive/negative nature of the comments cannot be determined, a positive Whuffie point amount of a lesser amount would be attributed, weighted by the Whuffie of the entity issuing the comment.
  • If no comment is available, views should be used (# of time a video was viewed), agained weighted by the Whuffie of who viewed it if possible. Views should contribute less Whuffie points then comments.
  • In all cases, for each item published a number of points should be provided multiplied by the number of followers the person/entity has on the site where the life stream item is posted on (# of subscribers to RSS feed, # of Twitter followers, # of Flickr contacts, etc.).

I don’t really have a precise idea of what these point amounts should be. Let’s say +10 for a positive comment, -10 for a negative comment, +5 for a comment, +3 for a view, and +1 for a published item.

Let’s also say that these points would be weighted by 1/100 of the Whuffie of the person commenting, viewing or following the publisher/life stream item. so, if my Whuffie is 1,000,000 and I view an image of someone, but do not comment on it, that gives 10,000 Whuffie points to the person who posted this image.

Of course this algorithm reduces the number of arbitrary constants to a few, but these are still arbitrary. So, the next question that came to my mind is whether there is a set of constant values that would be better than another, better for instance at achieving the goal of a Whuffie system.

What is such goal? do we want a bell curve distribution of Whuffie scores, a very spiky curve or a very flat curve. Do we want Whuffie to last indefinitely, or to self-destroy over time (with the objective of preventing social capital to be too concentrated among too few people). I think this is where I should have started, but that I will the subject of another post hopefully. In the meantime, I will get good ideas/suggestions from you.

Another interesting problem is how we fight spam and reputation hacking in such a system. I think one partial answer would be to allow Internet hosts to have their own Whuffie, and to use that as an additional weighting factor. Ideas here are welcome as well.

Fostering innovations through prizes

I’m not a big fan of Senator McCain but I do think that his proposal announced today for “a $300 million government prize to whoever can develop an automobile battery that far surpasses existing technology” is an excellent tool to foster energy innovation.

The winner-takes-all big prize strategy has proven successful in the past (DARPA Grand Challenge, X Prizes). And $300 million ($1 per American citizen) is much more motivating than the $10M Progressive Automotive X Prize.

I haven’t read the details of his proposal, but I hope that the technology that wins this prize will end up being open sourced for anyone to use. I don’t know how unrealistic these open sourcing terms would be though.

Business method patents: good or bad for the U.S. financial services?

PaymentNews pointed to a research paper title “Business Method Patents and U.S. Financial Services” authored by Robert M. Hunt of the Philadelphia Fed.

As any researcher in knowledge economics would know, maximizing the value of knowledge for society is a difficult problem:  on one hand, you need to provide the proper incentives for innovators to invent (typically a patent system that provides a time-limited monopole), and on the other hand you want this knowledge to be used as fast as possible by as many people. Finding the right balance is not easy. This is a subject I’m really interested in, and business method patentability is a very interesting on its own, so I went through the paper. Here are my notes.

Here is the most important part IMO from the conclusion:

There is at present very little evidence to argue that business method patents have had a significant effect on the R&D investments of financial institutions. It is possible that the availability of business method patents has encouraged more entry and R&D by start-up firms or more efficient trading of technologies. At present, however, these represent intriguing possibilities and not outcomes that have actually been measured. In short, we still cannot determine whether financial patents are creating value for the U.S. economy.
[…]
The combination of significant technological overlap among firms, elastic patent boundaries, inadequate enforcement of disclosure requirements, and weak patentability standards raises at least the theoretical possibility of perverse outcomes (Hunt 2006). In such environments, firms may obtain more patents but perform less R&D, since the fruits of such efforts would be subject to an innovation tax imposed by rival firms.

My thoughts:
I think this area of patents is still evolving and regulators are still learning how to best optimize the value of the U.S. economy of patent issuance. There is a risk that startups be issued business method patents that other FIs license only to see themselves fought to death by large FIs in court. I don’t think it will be a big problem for niche markets, but it would be interesting to see what a court would decide if consulted on the non-obviousness of a business method patent issued to a small firm and which possibly has a huge impact/potential to many large FI players.

More excerpts:

A decade after the State Street decision, more than 1,000 business method patents are granted each year. Yet only one in ten are obtained by a financial institution. Most business method patents are also software patents.

That’s 10 business methods per year coming from a FI. Wow! The remainder of the article is basically trying to explain why these numbers are so low. Probably most of banking related business method patents come from startups (ex. SmartyPig has a patent on their business method).

Financial exchanges and the central bank are more research intensive than credit intermediaries (banks and thrifts).

I don’t think that will come as a surprise to anyone. I wrote earlier about the innovation problem at banks (I should have precised credit intermediaries as I’m well-aware that innovation is thriving in the investment side of banks).

Number of financial industries rely heavily on standard setting arrangements esp. payments networks and financial exchanges.

The article seems to imply here, if my understanding is correct, that business method innovation requires multiple parties to implement it, which means it’s hard for any one party to patent it at the same time that it seeks others to use (license if it’s a patent). That’s as if you had to pay to use a standard…

Lerner (2006) finds that business method patents are litigated at a rate 27 times
higher than for patents as a whole.

The reason for this is that the legal aspects of business methods patentability is still evolving. This might be another reason why business patents are few. It’s easier to keep them as good old trade secrets when possible, than try to patent them only to have to pay an army of lawyers to litigate them.

The article also talks about the legitimacy of licensing a patent and fighting in court in validity at the same time.

Les banques devrait-elles devenir des fournisseurs d’OpenID?

This is a translation in French of an earlier post.

Il y a presque dix ans, au sommet du boom Internet, je me rappelle avoir avoir discuté avec un banquier qui me suggérait que dans le future, le rôle des banques ne se limiterait pas a garder l’argent de leur dépositaires, mais aussi à garder leur identité en ligne secrète. D’une certaine manière, cette prediction s’est concrétisée par le biais des programmes de protection contre le vol d’identité. Cela dit, si l’on définit l’identité comme la somme des informations personnelles qui distingue une personne d’une autre et qu’il est difficile voire impossible de se procurer, on voit bien qu’une grand partie de ces informations (et en particulier les secrets tels les mots de passe) sont disséminés dans un grand nombre de services en ligne (60 en moyenne, bientôt 200, d’après une étude du Yankee Group sur OpenID).

Comme chacun sait, OpenID constitue la solution non-propriétaire à ce problème, et pour les raisons présentées ci-après, il semblerait que les banques soient des candidats parfaits pour devenir fournisseurs d’OpenID:

  • “Qui peut le plus peut le moins”. Le niveau de sécurité imposées par les services en ligne aux mots de passe de leurs utilisateurs ainsi que l’intérêt des utilisateurs à avoir des mots de passe difficiles, varient d’un service en ligne à un autre, mais la banque en ligne est probablement un des services ou le niveau de sécurité des mots de passe est le plus élevé. La raison est simple: il s’agit du service où les utilisateurs ont le plus à perdre si leur mot de passe se retrouve dans de mauvaises mains. Ainsi, on peut difficilement imaginer un utilisateur s’authentifier auprès de son service de banque en ligne avec son le nom d’utilisateur et mot de passe de son compte Google, mais l’inverse est beaucoup plus plausible
  • Les banques ont plusieurs actifs existants relatifs à la sécurité:
    • Elles ont déjà en place une infrastructure technique assurant la sécurité de l’accès en ligne aux comptes bancaires,
    • Elles ont pour la plupart une image de marque forte en terms de sécurité, et
    • Elles ont déjà en place des programmes de protection contre le vol d’identité qui fourniraient un complément d’assurance à OpenID, et ferait de cette technologie une vraie solution/vrai produit
    • Les banques sont tenues légalement de connaître leurs clients, et ont pour cette raison probablement beaucoup plus d’information sur leurs clients (par example, documents officiels comme carte d’identité) que n’importe quel autre service en ligne (mais pour combien de temps encore?). Cela veut dire qu’elle possèdent le plus large éventail d’options d’authentification, leur permettant de supporter plusieurs niveaux d’authentification. Elles ne sont pas limitées au model d’OpenID classique de l’URL et du mot de passe: elles peuvent non seulement décider d’émettre des URLs OpenID qui soient distinctes du nom d’utilisateur, mais elles peuvent aussi et surtout utiliser une authentification multifacteurs, par exemple envoyer un numéro personnel secret par SMS à un téléphone mobile, ou demander à un utilisateur de cliquer sur un bouton pour être appelé par un centre d’appel, comme spécifié par les OpenID policy extensions.
  • Enfin, il existe de très bonnes raisons économiques. Un service OpenID offert par une banque consituerait:
    • Un service à très forte valeur perçue (mot de passe unique pour potentiellement tous les services en ligne utilisés par un utilisateur) que les banques pourraient faire payer
    • Une nouvelle façon de promouvoir leur image de marque: compte tenu du fonctionnement d’OpenID (redirection vers le fournisseur OpenID pour chaque authentification) les utilisateurs verraient le logo de la banque à chaque authentification.
    • Un formidable outil marketing: les banques auraient connaissance de quand quel utilisateur utilise quel service et pourraient présenter en fonction des offres et publicités liées ou non à leurs produits lors de chaque authentification,
    • Une très bonne manière de garder leurs client: le coût de changement de fournisseur OpenID s’ajoutant aux autres coûts de transfer de comptes bancaires à une autre banque.