Good Banking

I’m reading the live blogging of the Bernanke hearing today, and I’m pretty shocked by the following conversation:

Bad lingo | 3:59 p.m. Emanuel Cleaver, a Democrat from Missouri, condemns the term “bad bank.” He says the term does not exactly inspire support for the program. Maybe it should be called the “Damascus Road” bank, he says, or maybe the Fed should have a linguist look into something else more appealing.

Mr. Bernanke replies that it’s officially called an “aggregator bank,” not a “bad bank.”

Mr. Cleaver says that term is unlikely to catch on, and that perhaps a three-year-old should come up with something that rolls a bit more trippingly off the tongue.

Well, what about “Good Bank”, and what about making it more than just a sweet name?

I’m convinced Americans want good, ethical banking, the kind of banking that focuses on developing healthy communities where they can live and raise their kids. Just like anyone else on this planet. More importantly, they want HOPE, and good banking IS hope.

Bruce Cahan says it very well:

What We Had

The earliest banks were built by business, civic and religious leaders to grow hometowns, in regions they knew best. Community banks and bankers exist as a minority, often still independently-owned.

What We Lost

Today, most deposits (upwards of 80%) in America’s large cities are held by banks headquartered elsewhere, accountable to no one locally, except regulators in Washington or the state capitols who are easily outmaneuvered through lobbyists, industry political donations and complex financial instrument structures that camouflage the transparency needed to see simple causes and effects.

America’s banking system has lost its roots, has lost its way. “Safety and soundness” used to mean bankers living in and knowing their home regions and the people, businesses, governments and nonprofits there. Now Wall Street financial services mega-banks and investment professionals have fractionalized underwriting, ownership and obligation to the point where hedged bets on leveraged obligations (e.g., home mortgages or corporate bonds) create a rapidly cascading morass of multiplexed risk, drying credit up for other purposes in places where the risks are less or could be underwritten more safely and simply. As rogue traders have shown, the whole house of cards can easily unravel, with the use market capitalization and Federal Reserve costs unwinding such positions entails.

What We Need: An Ethical Bank

We need more ethical banks, where decisions are made transparently, its allegiances trace back to community concern and its pricing of credit and investments is directly tied to the contribution each transaction makes to growing regional health.

Hayes Valley Money (report from the field) and Play it Forward Akoha cards

Hayes Valley Money

From wikipedia:

Hayes Valley is a neighborhood in San Francisco, California, between the historical districts of Alamo Square and Civic Center. Victorian, Queen Anne, and Edwardian townhouses rub shoulders with boutiques, restaurants, and public housing complexes.

In November 2008, to fight a worsening recession, Hayes Valley started to print their own money with the Hayes Valley Money rewards program. Here’s how it works:

shop at any participating merchant for a chance to win a Hayes Valley Money card good for $5, $10, or even $20! You can use your reward card in the shop where you got it or at any other participating store. Just look for the “money card participating merchant” signs in store windows or refer to the list below. Hayes Valley Money rewards cards are good for 30 days

This is currently a very low-tech endeavor: to prevent forgery, the money cards are signed by hand by each merchant at the time they are given to customers, together with the expiration date. “We are currently 16 merchants participating in this program and we all know each other, so it would be very hard for someone to forge” explains Russell Pritchard of the Hayes Valley Merchants Associaton.

Russell explained that so far, he has been a bit disappointed by the number of merchants joining the initiative (16 so far), but he has been really encouraged by the reception from customers. So far, out of the 30-40 rewards he has given out, only several came back from other merchants, most likely because people haven’t used them. He may typically give a $10 reward for a $100+ purchase and may a $20 reward for a $200-500 purchase. But he said, and this is interesting, that it happened that he actually gave away some of them to some people he knows shop locally or were considering buying a piece of his store.

From a “backend” standpoint, the rebate collected by merchants are simply counted and returned to the issuing merchant. Rusell acknowledged that the easy-to-setup adoption of a paper/signature-based system has drawbacks in terms of tracking and clearing between merchants, but it’s a start.

Russell hopes that this initiative will be duplicated all over the city with the support of the city of San Francisco. He personally handed a rebate card to mayor Gavin Newsome, who has been personally supporting local shopping during the holiday season, and recently reminded him that he hadn’t used it yet.

My comment

Because the rebate issued is not re-circulated after it has been used once, we cannot strictly talk about a currency (currency comes from current, something that flows). In the current model, merchants are essentially injecting their own money into the neighborhood, creating an incentive for visitors to shop at more than one store in the neighborhood in a short period of time. I suspect this model might lead some of them to think that they might give more than others do.

The next step in my opinion would be to move to a real currency model where received rebates could be used by businesses to trade with one another. In this scenario, the rebates received by a merchant would not be returned to the issuing merchant, but simply used to trade with another merchant. It might not make sense in a community of 16 merchants, but if the community is big enough and involve a wide variety of business types, it will.

Still, there would be something missing in this model: no community value would be created. One way of doing so would be for merchants to donate some of their rebate cards to local community services that would be then use them to fund their activities by using them, or reselling them for hard dollars to local residents willing to make a donation, but without losing purchasing power.

Parallel with Play it foward Akoha cards

A tweet from @akoka picked my attention today. The original idea is for customers to thank each other with rewards cards and propagate good karma, but there is a possible connection between the Hayes Valley Money rebate cards and Akoha cards: stores could easily leverage the Akoha awesome tracking infrastructure to print cards, hand them out to customers, track through which users and which merchants they have been through.

If the merchants themselves play them forward, until the cards they issued are returned to them, as I suggested above, they could effectively measure how many transactions they have incentivized through their rebate cards.

Last, merchants could also easily connect with customers without ever asking them their email or contact information, since Akoha users typically register the card on their Web site to keep a tally of karma points they have accumulated by passing the card along.

The need for an Open Money Foundation

I’ve discussed this topic with Michael Linton and Marc Armstrong this WE.

Problem: community currencies are a $0 Billion market and promoting their development in a way that ensures and maximizes their potential for communities is expensive. Examples include travel costs or Web hosting costs. Today, although many parties are interested in the development of community currencies, there is no organization that represent their common interests that is able to officially receive donations for interested parties. These common interests today are mostly public awareness and technology interoperability, but will eventually include – should we be successful – right to exist under rules dictated by the government of each nation where these currencies are used.

Solution: we formalize Open Money into an Open Money Foundation, a non-profit dedicated to ensuring and maximizing the potential of community currencies. We use Community Way to raise money: corporate sponsors that may include telcos, computer manufacturers, airlines, etc. These companies donate to the foundation their excess capacity in the forms of consumer coupons/vouchers (ex. voice minutes, bandwidth, computers, offices, miles, etc.) and the foundation uses these donations to finance its mission either by directly using them, or by reselling them for the currency needed.

Improving the home loan application process

I recently was very fortunate to purchase a house in San Francisco. As most home buyers, as part of the process, I had to get a loan approval  and to provide a lot of paper-based information. Unsurprisingly, I submitted this information in the form of electronically scanned print outs of various online Web services (thank Science I didn’t have to mail printed statements). This pile of information was then manually verified for accuracy and authenticity, and the relevant information was manually fed to a mortgage approval system.

Here is the information I had to provide:

    1. Hazard insurance policy
    2. Complete institutional statements covering most recent months + as applicable, reasonable explanation and documentation for any large deposits within the last 60 days
    3. Copy of the purchase signed agreement
    4. To verify salary: 1) paystubs for the last 30 days 2) last 2 years W2s
    5. Landlord reference verifying payment history for the past 12 months
    6. Verification of stocks/bons as stated in application
    7. Evidence of residency and employment status in the US
    8. Verified employment with employee through verbal conversation or electronic verification of employment
    9. Verification of applicant’s identity (identification certification document signed by authorized bank representative and faxed)

      I won’t talk about #9, which is simply ridiculous since I’ve applied for this loan at a bank I’ve been banking with since 1998 and who also handles my brokerage account. I don’t know how many times they have verified thoroughfully my identity. I won’t comment on #7, but needless to say that when I know very well that the INS has this information accessible in real-time. Regarding #3, it might already be possible to directly extract from a digitally signed pruchase agreement PDF form the relevant information. If not today, probably very soon.

      What’s really interesting is #1, #2, #4 and #6.

      #1 is information I received from my insurer, but I assume it is available from my insurance’s Web service in HTML/PDF format.

      #2 and #6 (and partially for #4 since I receive my paychecks by wire transfer to my checking account) is information that can be retrieved today directly from my bank or brokerage’s firm Web service.

      There are several building blocks needed to achieve this:

      • Information can be extracted from content. This assumes that the HTML content is either semantically tagged using a (yet to define) microformat, or available in alternative format, say some industry XML standard like ACORD XML for insurance or OFX for banking/brokerage information.
      • I can tell my bank to authorize the inquiring party that they can retrieve specific pieces of information. Also, I can specify to the inquiring party who they can inquire this information from. This is were an authentication delegation protocol like OAuth can be useful.

      #4 (Landlord reference verifying payment history for the past 12 months) is interesting. My current landlord and I banking at the SAME bank, I would have enjoyed the possibility of being able to tag some of my transactions with “rent” and share it with him so that he could validate them.

      What community currency networks we learn from barter networks

      Barter networks such as ITEX, BarterCard or IMS are very poorly understood systems. The word “barter” conjures archaic, depression- or war- era visions of people swapping food for medical supplies.

      In reality, these systems are membership-only closed networks or clubs where small to medium business (typically less than 50 employees) trade their surplus capacity using a currency that is proprietary to each network (most businesses do not operate at full capacity, for instance, many hotels operate at 60% occupancy rate). These small businesses could include a florist, Web site designer or lawyer.

      Instead of trading with, say, U.S. dollars and having to sell their products/services at huge discounts (in buying power) in the open marketplace, they trade with ITEX credits or BarterCard credits, which can only be earned by selling to another business or the network, and can only be redeemed for goods/services from another merchant in the network. The result for participating businesses is that they keep their buying power, but from a limited set of businesses: same buying power with less choice.

      These networks work almost conversely to the national money-based marketplace we are all familiar with. In our marketplace, money is relatively more scarce than the people who accept it. In a barter network, people who accept the club-only money are relatively more scarce than the money, which gives essentially artificial demand (compared to the actual demand on the open marketplace) for their unsold products/services. For instance, some members drive 100 miles to buy wine from another member, simply because they have credits they earned and that member accepts their credits.

      The functions of the operators of these networks are interesting:

      • supply/demand monitoring and balancing: when a business applies for membership, their business is reviewed for relevance. Obviously, you don’t want to have too many businesses providing the same goods/services, since it would defeat the advantage of a membership-only marketplace.
      • credit allocation. Depending on the network’s rules, the member may have to earn credits before it can spend them, or it may be able to get a certain quantity of credits just based on the relevance of their business to the network, i.e. expected demand for their goods/services.  So, a business with very relevant offering gets credit, while one whose business is already overrepresented may not or may get a smaller credit. In some networks, the actual creditworthiness of the business as measured by credit bureaus might be a factor as well.
      • debt collection. If a member leaves, debts may be seeked using standard legal debt collection procedures (in national currency this time).
      • risk management. In some cases, a member goes out of business with a negative balance. To compensate for these losses, the trade network will typically tax all members a small fee on a regular basis, in the propriety currency, not national currency.
      • banking. The network needs to keep track of accounts, credit extended, as well as provide various ways for members to use their balance (check, online, mobile, etc.). The network also generates tax filing reports (barter transactions are taxable in the US via form 1099-B). There is typically no foreign exchange service provided (exchange of trade dollars for national money) and no interest earned/charged on positive/negative balances.

      I’m not saying that barter networks are the panacea. I think they serve the need of their members, but most importantly or their shareholders. In contracts, community currencies server the purpose of their community: neighborhood, social network, etc. Yet, there are several things that community currency systems can learn from these barter networks:

      1. Self-sustainability. A closed community with a proprietary monetary system can sustain only if the system is self-sufficient. The system has to be thought as a self-sustaining ecosystem, and great care must be placed on the participants encouraged to join so that not a single category is over-represented, and so the currency circulates. (Similarly, an open community with its own monetary system that would offer convertibility to other currencies must have balanced flows of goods/services (trade balance) with other communities using other currencies, or will risk a run on its currency: trade matters.)
      2. Fault-tolerant credit system. A credit bureau and a loss pool is probably necessary if the network is quite large. The credit bureau is a pre-emptive tool, and the loss pool is just a practical answer to the reality of business cycles.
      3. Strong debt fulfillment incentives. Debt collection is a problem in a community currency, and IMO this can only be solved by making membership something valuable enough to the member that it would do anything possible to not default on its debt. This can be achieved by making membership socially desirable to members i.e. something they can use to advance their status within their society. The stronger the incentives, and the lower the debt default risk, the stronger the currency.
      4. Reliable and secure operational infrastructure.

      Open a savings account, sponsor a tree


      La Banque BCP participe au reboisement du Portugal

      Originally uploaded by xtof
      I think this is a cute “green” marketing flyer. You open an account and put money there, which is put “to work” somewhere you don’t know about (possibly a deforestation business), and you feel good about it because you sponsored the plantation of a tree.

      So, why not simply having a savings account actually backed by timberland?

      Timberland is a great investment IMO: 4% natural interest rate, and if you don’t need the cash a given year, you just don’t cut the trees (did I mention inflation protected? and actually useful if you can cash it out in firewood?).

      The other advantage would be that you’d actually know where your money is put to work (instead of a mere single tree).

      Using CommunityWay to save a local community service in San Francisco

      Like many community services, Access SF, San Francisco public access station might close its doors because of a $500K budget cut.

      I think Community Way might be a good model for them to raise these $500K. Here is how it would work:

      1. Access SF issues Access SF dollars.we could also call them vouchers or coupons
      2. Access SF negotiates with local businesses to get Access SF dollars accepted as payment for part of what is owned by customers. For instance: a local restaurant would accept 10% payment of the bill in Access SF dollars. Access SF explains that they will advertise Access SF dollars benefit on their channel and Web site, which will attract new business.
      3. Access SF sells Access SF dollars to SF residents on their Web site and at their office. These US dollars are used to fund the $500K.

      Local businesses get advertising. Local residents get to support a community service without losing purchasing power. The community service gets its real dollars.

      If Access SF sells $50 worth of Access SF dollars on average to 10,000 local residents, they’d get their $500K.

      Twitternomics, the Twitter currency, and the monetization of Twitter

      In my previous post, I argued that the ReTweet (RT) is the currency of Twitter. The rationale goes: When you RT, you extend or donate some of your reputation to the Twitter user who originally tweeted, and you should earn something for it, say some RT credits or possibly even some hard dollars. The service ReTweetRank, which ranks people according to how much their tweets are re-tweeted seems to follow the same line of thought:

      Retweets are great indication of the originator’s topical influence and the audience’s interest.

      There is a major issue with my argument though:  it’s not because I donate something to you, that it necessarily has value to you. It only does if you acknowledge so. We can assume it does since you are following the person, but that’s a quite rough estimate.

      So, things are a little more complex and we have to dig a little deeper. It’s good to start with some Twitter economics or Twitternomics:

      When you tweet (or re-tweet), you essentially donate to your audience a piece of information that you think has value to them. But only when your audience acknowledges your tweet’s value, you should earn something from them.

      What are these acknowledgments:

      • The simplest form of acknowledgment is to spend the time to read the Tweet, but unfortunately that’s not trackable. The closest thing is to know which unique Tweets in the authenticated user’s friend timeline has been retrieved from Twitter, which is not easily trackable across all Twitter clients (except by Twitter themselves).
      • The next form of acknowledgment is to click on the link provided in the Tweet, if any. Normally these clicks would be hard to track, but since most Twitter users use URL shortening services like Tr.im, the URL indirection provides a point of tracking how many did visit the URL. One problem is that it is difficult to track who actually clicked, but this could be easily resolved if Twitter or a Twitter intermediary was rewriting all the URLs to include the username of the authenticated user.
      • The next form of acknowledgment is the ReTweet.
      • The ultimate acknowledge is to make the Tweet a favorite. I put this one at the top because it is a persistent acknowledgment, not a transient acknowledgment like the RT or the URL click. But my guess is that it is also not as used as a RT simply because they don’t drive as much traffic (who tracks your favorite Tweets? not many people).

      To come back to when you earn or when you spend Twitter credits or Tweetbucks or RT$:

      • you earn a credit when someone acknowledges your Tweet. Say, 1 Twitter cent for a view, 3 Twitter cents for a click, 5 Twitter cents for a RT and 8 Twitter cents for a fave. This isn’t too far from what I mentioned in last year post How to measure someone’s Whuffie.
      • conversely, you pay 1 Twitter cent for a view, 3 Twitter cents for a click, 5 Twitter cents for a RT and 8 Twitter cents for a fave. In other words, it costs you to be nice to others (giving attention or clicking buttons and writing things takes some of your valuable time indeed).
      • The ReTweet is a special case. If @a retweets @b (“RT @b check out this link http://tr.im/3kbs”), it would make sense that any click on the link or further RT (“RT @a RT @b …”) should earn both @a and @b something. @a acts as a distribution channel and should take a share of the credits earned, say 50%.

      So far, this is a zero sum game with funny money and no-one loses anything.

      Just like RetweetRank, a list of the richest (in Twitter $) Twitter users could be compiled and people may start to compete for a better rank.

      A simple business model might consist in providing a foreign exchange mechanism between Twitter $ and real U.S. dollars. Twitter users with positive balances would be able to offer their Twitter $ for sale, and Twitter users with negative balances would be able to offer to buy in U.S. dollars. Twitter would simply take a commission on the fee.

      Of course, this isn’t incompatible with Twitter offering the possibility for users to pay for RTs rather than charge for them, as a way to provide additional incentives for users to RT.

      “Please ReTweet”: RT as currency and Twitter social ad business model

      There have been various discussions in 2008 about what business model Twitter should use to monetize its user base. I’m not aware of any that have considered how the Retweets (user’s re-posts of existing posts of users’ they follow) could be leveraged into a social ad platform.

      Retweets are a powerful way for people to broaden the audience of their tweets beyond their immediate followers. Some people spontaneously retweet interesting tweets posted by others, but some users actually request others to retweet their posts. Every minute or so, there are several Twitter users asking their followers to “Please RT” a link they tweetted about, whether it is to promote an event, an widget, some marketing offer, or to find someone. Here are some recent examples:

      DuongSheahan: It’s tonight! Christian Women Tweet Up 9pm EST Go here to register: http://bit.ly/N1uv (expand) #cwtu Please RT

      RefugeesIntl: RT @deborah909 Please help me spread the word about this new widget for advocacy groups: http://tinyurl.com/9jfm96

      micaela6955: Win a $50 Pet GC at http://www.consumerqueen.com/?cat=15 Please RT!

      RT @shefinds: We need a NYC intern – please RT to anyone you know http://newyork.craigslist.org/mnh/wri/985342234.html

      Currently, when users kindly retweet these posts as requested by their sender, they do not earn anything, soft or hard dollar. A Retweet is essentially a favor you make to someone because you can and you want. This favor might be worth a lot, considering that many Twitter users have 1000s or 10,000s of followers.

      One way that Twitter users could earn something would be through a favor  bank, or in this case a Retweet bank or Tweetbank for short. The concept of favor bank is not new (I love this one in particular). Paulo Coehlo even mentioned the concept in his book The Zahir.

      Here is how it would work:

      • When you retweet, you are making a favor, and you earn Tweet credits in the amount of the number of followers you have.
      • When you are retweetted, you are using a favor, and you lose Tweet credits as were earned by those retwitting your post.
      • You can’t really go bankrupt here, although you could go deeply negative if you are highly retweetted, which should encourage you to pay back by retweetting others.
      • If you are retweetted a lot, this should prompt others to follow you, which would make your RTs more valuable and make it easier for you to track your “debt”.
      • If you are in debt, and don’t want to be anymore (although it has no real consequences for you), you might be tempted to spam your followers with a lot of RTs. That would be a very bad idea actually, since it would certainly tire your followers who will surely decide to not follow you anymore, making your RTs in turn less valuable and your debt harder to repay.

      This would be a nice little game with no real financial consequence for either one. But it could be pushed a step further with some users actually deciding to incentivize RTs with actual U.S. dollars.

      When you consider that an ad by The Deck displayed in a Twitterific client costs roughly 5 cents (based on their December 2008 statistics/pricing), some may think they deserve a share of the advertising they provide: after all, they generally retweet if they consider that the tweet is relevant to their audience. With a 5 cent per RT, if you only have 20 followers, your RT is worth $1, $100 for 2,000 followers and $500 for 10,000. Not pocket change for many.

      The way it would work is that a user willing to pay for RTs would set a max $ budget for RTs payment. Other users retweetting would earn the same credits as above but redeemed in dollars for the exchange rate of say a few cents, with Twitter taking its share as well.

      A really nice plus of this model is that it would allow Twitter to monetize its user activity on any client, whether Web, Desktop, Mobile, SMS, etc.

      Farmers markets and community currencies

      Crescent City wood token

      Yesterday, I found myself explaining the concept of local community currency to someone who had never heard about them before. Because we were next to a farmers’ market, I picked that context to support my stories about the benefits of local community currencies.

      I built upon the story of the Taft Farms local currency, in which a farmer issued his own money to raise funds for the winter, and I explained that a farmers market could create a bank that would issue paper money redeemable only at the farmers market the following year, possibly at a discount (ex. $9 for $10 face value) and use the cash raised to provide credit to farmers in need during the winter season.

      Additionally, the farmers market bank could promote itself by donating some of this paper money to non-profit organizations of its choice in exchange for ads for the farmers market in promotional materials issued by the non-profit organizations. Non-profits could follow the Community Way and sell this paper money at auctions to raise funds in real cash.

      Last, I explained that the farmers market currency might be denominated in a different unit than the US dollar, say a “basket”, which composition would be defined by the farmer’s market every year. You could buy today baskets and use them as an inflationary hedge if you are a regular customer of the market and are worrying about your fiat national currency losing purchasing power over time.

      Today, I found that some of my examples are not that far-fetched from reality.

      The Farmers Market in Venice, CA has a program, which is very similar to Community Way: it offers certified market money subsidized by vendors to the organizations of their choice in exchange for mention of the donation in the printed materials of the events organized by organizations receiving donations. Organizations can use this market money to purchase good or auction them off to raise funds for the organization.

      I also found two cases of farmers market tokens used as cash alternative: Crescent City Farmers market and Portland Farmers Market both provide a way to buy at one time batches of wood tokens that can be used as cash on the market. This is actually provided as a payment facility for those who want to shop with their credit card at merchants on the market not accepting the, but it could be easily extended to support the scenarios presented above.