Guillaume’s blog

A Credit Union in France just announced the opening of a new online agency called Tookam. Besides a number of innovation related to social networks, the new agency provides a virtual currency that helps businesses engage their customers with charitable rewards, that is: rewards that can be turned into donation in government money to a charity chosen by both the business and the customer.

It’s an interesting variant on the “donate 1$ and our business will match it”, instead: “give us $x of your business and we will donate $1 to one of the charities we support”

It works as follows:

1. The business establishes a rewards program in Tookets and pre-defines a number of charities that the tookets can be converted in Euros and donated to.
2. Customer earns the tookets as they do transactions with the business.
3. The customer can then turn some of the tookets into Euros and donate them to one of the charities pre-selected by the business.

What’s interesting here is the alignment of values that it creates between the business and the customer. By looking at the list of charities that the business’ rewards program support, the customer can decide whether to increase or stop shopping at this particular business.

This program fits in the larger trend of rewarding real-life purchases with virtual currency. By defining what their rewards currency can be converted in, the business has another opportunity to express their mission and connect meaningfully with their customers.

There is no reason that this model be limited to charities: rewards could for instance be converted to donations to specific projects, such as the ones found on SpotUs or Kickstarter.

I’ve been thinking about the recent rise in subscription models for content such as The Daily or the New York Times paywall. Alan’s recent invitation for thoughts on his related post gave me the perfect reason to write something.

I’m in the camp of those who think that good content is independent content, produced without influenced from advertisers, and authored by dedicated people who spend precious time to research. I also think that good content is accessible content: available to many, if not to anyone, to read, correct or comment on. It’s content I can share, content that I don’t need to pay for before I read.

I believe the pragmatic short-term solution to these challenges is to combine the use of appreciation currencies like Facebook likes, twitter RTs or Google recent +1 with content aggregators.

Growing up in France, I remember being explained that public channels weren’t really free: for each TV set you’d buy, you would pay a yearly tax called “redevance” or television license to the state. In turns, the state would use audience tracking service to figure which channels were most watched, and would split the reveneus of redevance accordingly to the channels.

I don’t know what the status of redevance is, and I am no fan of statism. That said, I do like the idea of paying a monthly fee that gets split into what you actually consumed and liked. This is what Flattr does, but it works on a voluntary basis, which effectively limits its potential.

For such a system to work, you need:

• a way charge a subscription to a large enough collection of private content,
• a way for subscribers to rate and share content with their friends who are on the same network,
• a transparent allocation of revenues to the content producers according to audience metrics.

I don’t know if NetFlix uses a similar model to compensate content providers, but if not, this could work for them, right now. They could literally open their doors to many short or long form content creators and provide them a share of their monthly subscription fees based on audience metrics.

Think NetFlix + Vimeo + Flattr.

I attended tonight a panel on the interchange rules that will be proposed by the Fed by April 2011 and enforced by July 2011. The panel was composed of representatives from issuers (Bank of the West) acquirers (WestAmericaBank), Prepaid (Mastercard, Plastyc), Alternative Payments (Bling Nation).

There were many disagreements on what the impact will be on the many entities composing the complex card payment ecosystem. If there was one agreement it is that this regulation will have unintended consequences and possibly backfire on the government’s good intentions. But the positive outcome is that it may act as a trigger to force participants to innovate above what may quickly become a commodity: moving money.

Examples of unintended consequences:

• Free checking is likely to disappear. This may increase the population of banking dropouts: “formerlybanked”.
• Savings may not be transferred to consumers.
• Merchants might start to discriminate between cards issued by issuers who are exempt from the Durbin amendment (FIs with assets of $10B or less). “Citi or BofA cards only please” “You came from Redwood Credit Union? we can’t accept that card”. Note that while some Visa rules in theory prevent this, some participants in the audience have argued that these rules don’t have much court value.
• Banks moving to unregulated a.k.a. (yet) unregulated payment networks to drive revenue. “We are interested in you because you are not regulated”.
• Banks will likely move increasingly in the prepaid area, pushing high debit customers into new products like segmented spend, allowance cards. With the right prepaid product, banked employees might switch to prepaid.
• Banks may consider charging for ACH.
• The Fed may end up having to regulate many more players such as Google/PayPal, which may unfairly benefit from such rules.

On the innovation side, Bling Nation’s Wences Casares compared the current payment ecosystem to the telco ecosystem in the late 80s. Everyone back then was focused on voice. Then suddenly voice become a commodity and everyone had to come up with new products. He believes that payment business is in a similar situation of becoming a commodity very quickly as a result of such regulation, which may trigger a wave of innovation on top of the payment layer that can drive revenue.

Patrice Peyret of Plastyc was quick to remind that this analogy breaks down when you look at the current protocols, which are simply flawed at heart. New protocols, designed with security and real-time are likely to be required for innovation to be unleashed.

Towards the end, Wences reminded the audience that contactless has little benefit for the merchant or the customer, that the true revolution in mobile payment is in the new things that can be built on top, starting with but not limited to: Loyalty, rewards, deals, social, etc. I completely agree with this.

I just stumbled upon this interesting paper from the FRB on how to re-ignite the market for low-income housing tax credits. These are credits that investors buy so they earn tax credits they can apply to lower their tax liability. Currently this market has been limited to large players but the FRB paper suggests it may be good to open it to individuals directly.

The universe of Low Income Housing Tax Credit (LIHTC) investors is limited to a small group of large institutions. Since the tax credit was created in 1986, banks, corporations and government-sponsored enterprises (GSEs) have purchased nearly all the credits made available through the program. Unfortunately, the concentration of investor demand in a small group of institutions has introduced volatility to the LIHTC market. Specifically, demand for these tax credits has proven extremely cyclical. As financial institutions and other large institutional LIHTC investors suffer losses (as they have in the current recession), their appetite for tax credits decreases rapidly. The result is a collapse in the price of LIHTCs, which endangers the very feasi­ bility of tax-credit-financed affordable housing projects.

Affordable housing investment was not always domi­ nated by large corporate entities. In fact, individual taxpayers played a prominent role in financing afford­ able housing development during the early 1980s. That role changed with the passage of the Tax Reform Act of 1986.

Prior to this legislation, individuals could deduct construction period interest and taxes, accelerated depreciation, and amortization of building costs. Taken together, these tax benefits were significant enough to attract many wealthy individuals to the mar­ ket. By 1986, however, Congress had become wary of overly generous tax benefits, loopholes and deductions. The result was the passage of new passive loss, passive credit and at-risk rules. Among other changes, the new rules established a financial disincentive for individual taxpayers to claim credits in excess of their marginal tax rate multiplied by $25,000. These rules have not been updated since 1986 and continue to suppress individ­ ual demand for tax credit investments.

Benefits of Individual Investors

Bringing individual investors into the LIHTC market would have several important benefits.

First, bringing individuals into the LIHTC investor pool would stabilize pricing and create a more robust market for the credits. Of course, individuals are not immune from economic hardship. Nevertheless, most people carry tax liability from year to year and, presumably, would benefit from a program that offsets this liability.

Second, individual investors would also help round out the LIHTC market’s financing of smaller projects and underserved geographies. Increasingly, large institu­ tional LIHTC investors have dealt directly with afford­ able housing project developers. To maximize efficiency, investors have sought large projects with correspond­ ingly substantial tax credit allocations. As a result, “it has been difficult to attract corporate investor interest to small and rural deals, since corporate investors look for larger deals with higher amounts of tax credits to offset their federal tax liability,” according to the National Association of Home Builders.2 Individual investors, by contrast, have lower tax liability than corporations and might be more attracted to smaller deals.

Finally, opening up the LIHTC market to the grow­ ing number of individuals seeking social impact invest­ ments would diversify the investor pool. According to the Social Investment Forum, “socially responsible investment (SRI) encompasses an estimated $2.71 trillion out of $25.1 trillion in the U.S. investment marketplace.”3 This growing market indicates that investors are increasingly looking for mission return in addition to financial return. Financial products such as socially responsible mutual funds, positive and nega­ tive stock screens, and deposit accounts in community development credit unions are frequently used by individual investors to satisfy both social and financial preferences. Socially motivated individuals might also invest in LIHTCs if given a cost-effective, efficient way of doing so. This would benefit the market by further diversifying the pool of LIHTC investors.

Barriers to Individual Participation in the LIHTC Market

In addition to passive loss tax restrictions, individuals have largely remained outside of the LIHTC market because of four key challenges: high transaction costs, program complexity, compliance risk and the illiquidity of the investment.

High Transaction Costs

The limited tax benefits offered by LIHTC are often insufficient to offset the cost of individual participa­ tion. Tax-credit-financed deals can be multimillion dollar projects. New construction financed by LIHTCs can require raising tax credit equity of 70 percent of eligible construction costs. The cost of soliciting such investment from small-dollar individual investors is cost-prohibitive for most affordable housing developers (and most syndicators, for that matter). Historically, it has been more cost-effective to engage a select group of large investors not restricted by passive loss rules that can finance whole projects on their own.

Program Complexity

LIHTC deals are extremely complex. The technical expertise required to complete a LIHTC project is a dizzying array of real estate, legal, tax, development and policy know-how. Most individual taxpayers lack even a basic understanding of the LIHTC program—let alone how to responsibly evaluate the investment risks.

Compliance Risk

LIHTC investors are subject to credit recapture and penalties should a project fall out of compliance during the first 15 years of its operation. Compliance is a function of the rents charged to the development’s low-income tenants. Should rents exceed specific federal guidelines, the project is deemed out of compli­ ance, the credits are recaptured and a penalty is levied. Individual investors have likely shied away from tax credit deals because they lack the expertise to quantify and price the risk posed by this central program requirement.

Investment Illiquidity

The 15-year compliance period, coupled with restric­ tions placed on the reselling of credits, makes purchas­ ing LIHTCs a relatively illiquid investment. This tends to favor investors with long investment time horizons. Further, the tax benefits that flow from a LIHTC investment only begin when the project is completed. This can be up to three years after the credits are originally allocated. To date, corporate entities with long-term tax obligations have been most comfortable with the illiquidity of the investment.

An Individual Investor Solution

First and foremost, the easiest way to attract indi­ viduals into the LIHTC market is to change the passive loss restrictions that discourage individual investment. Whether the passive loss limit is increased or the rule is

eliminated altogether, increasing the tax benefit would make the credit more appealing to individuals. Even with tax reform, however, the barriers outlined above would still discourage many individuals from partici­ pating in the program.

While only a partial solution, the creation of a fully transparent online platform to broker the sale of tax credits to individual investors would address some of these challenges, specifically high transaction costs and program complexity. An online marketplace for LIHTC investments would keep the cost of soliciting capital low while simultaneously organizing and com­ municating important information to potential small- dollar investors. In fact, such technology already exists in the form of so called “peer-to-peer” (P2P) lending. P2P lending sites attempt to lower transaction costs by cutting out the middleman in debt transactions—usu­ ally a bank or a credit card provider. While the long- term viability of their core business model is unknown, P2P lenders such as Prosper, Kiva, LendingClub and others have demonstrated that individuals can lend responsibly in the consumer debt market. The same technology could be adapted to match LIHTC inves­ tors with affordable housing projects.

Direct Investment Model

The simplest method for organizing a LIHTC platform for individual investors is to directly connect these investors with affordable housing developers that have received tax credit allocations. Developers could post project listings on the platform and the tax credits they have available. As part of the listing, develop­ ers would also have the opportunity to promote the project’s financial and social merits as well as set the initial price for the credits. The investment period could be designated by a preset date or simply end when sufficient equity has been raised to proceed with the development.

Tax Credit Syndicator Model

A second way to organize an online LIHTC plat­ form would be to use tax credit syndicators. The platform could connect individuals to syndicators who identify and invest in LIHTC projects on their behalf.

There are two reasons to favor this approach. First, it addresses the complexity barrier noted above. Even with detailed project listings, most individuals would be ill-equipped to evaluate the range of risks that come with an affordable housing investment. In contrast, tax credit syndicators have a great deal of expertise and in-house capacity to accurately assess these risks and invest responsibly.

Conclusion

The recent collapse in the price of LIHTCs has exposed the folly in the market’s over-dependency on large corporate investors. Encouraging individual par­ ticipation in the LIHTC market would diversify and expand the overall investor pool, smooth LIHTC price cycles, bring untapped capital to the market, and help finance small, often rural, affordable housing develop­ ments that today struggle to raise tax credit equity.

An online LIHTC platform, while potentially dif­ ficult to scale and develop, would lower transaction and information costs and allow individual investors to enter a market that, heretofore, has been nearly the exclusive purview of institutional investors. Also, such a marketplace could allow for dynamic, real-time price setting. If sufficient scale could be achieved, a price auction mechanism would be effective in either of

the models outlined above and, importantly, it would create complete price transparency. Online platform or not, however, the benefits are clear: It is time to get individuals into the LIHTC market.

Here are some print ads for loan businesses I found in a 1938 San Francisco phone directory, while looking up some artifacts found in my house.

It’s fascinating to me that 70 years later, a lot of these messages are essentially the same, except they are transported via SMS, Web and email. I note also that banks and stock/bond brokers do not advertise.

Construction Traffic on I-376

Originally uploaded by daveynin

Whenever I drive I realize how much people behave differently when driving their little mobile avatars than when walking or bicycling. I’m for instance amazed to see people trying to get ahead of a single car in a 5mph traffic. I think there is a lot to learn from these behaviors.

Driving a car on a highway is quite efficient from the perspective of going from point A to point B, at least when and where efficient public transportation options are not available. In addition, driving a car has the advantage of anonymity: other drivers don’t know your who you are, only the car you drive and how you drive it. This implies that any legal but aggressive behavior, or illegal but uncaught by the police, has little consequence unless you get into an accident. Knowing that your name won’t be publicly tainted by your bad behavior is an incentive to behave aggressively.

When you walk or bicycle, it’s harder to get away anonymously. People can easily catch up with you and ask you about your behavior. This I think leads to more courteous behaviors.

To me this is similar to a market. In a market that’s completely anonymous and driven only by numbers and mediated by computers, aggressiveness can be expected to be high. In comparison markets that assume conversations between buyer and seller, haggling, behavior is likely to be more subtle. The main reason is that information about a dishonest participant will circulate very quickly in a human-driven market where anonymity is difficult than in a computer and broker-mediated market.

One option of course is to increase the regulation of the markets, which in highway terms is to have more police cars around: drivers stay anonymous to each other but completed naked to a few policemen. This implies that the monopoly of moral superiority is given to one small group, something I think is prone to corruption.

Another option is to limit anonymity and to facilitate sharing information on market participants. On the highway, this would mean dash applications that gives the ability to rate other drivers, directly from your steering wheel, but also that display right away warnings when a badly rated driver is approaching.

Limiting anonymity is much harder in financial markets, since it is easy to conceal a trade behind a chain of intermediaries. In a way, it’s the intermediaries job to help participants conceal their real intentions, especially those participants with the biggest impact on markets. Our financial markets are like high-speed highways with little police and very fast cars remotely driven by participants, in which many small investors drive their little car.

How can “social” improve the morality of markets, without succumbing to either a monopoly of moral superiority or a wild jungle with no morality?

Visa just announced a new iPhone application. I have registered one of my Visa cards, but have yet to receive offers. Here are some screenshots.

I am on a quest to find the ultimate digital-only gift. Not your 70% coupon, virtual gift card, farmville gifts. Something with the potential to make people say: “Wow! I wanted this more than a 13-inch solid state MacBook Air. How did you know?”.

Here are the criteria, that I thought are relevant:

• Unique: either something personalized to the recipient, and/or something that would be based on external data like time, temperature, so it would effectively be different all the time.
• Rival. One owner only at any given time. I would want my digital gift to be rival: if the recipient owns it, the giver does not have it anymore. This could work like this: you get a secret code or URL to access it, which becomes invalid, and a new URL is generated for you to access next time, or gift it so someone else.
• Re-giftable. This is useful since you may get something you don’t like. It’s also very fun.
• Economically hard to reproduce. This means it may be the result of a CPU-intensive process that could take several years to complete on a regular PC. Storage-intensive: this would make it unpractical to try to copy. The same goal can be achieved by making the gift very specific to the recipient.
• some public and social elements: ability to share some aspects of it with the public or specific friends. Starting with the ability to prove ownership of it, for instance by displaying the name of the current owner, or a digital signature. It may be possible to take snapshots of the gift and share them with friends, or perhaps share the experience of the gift with friends if one wants, but only as long as the gift is owned by the person inviting others.

So far, I haven’t found anything matching these criteria. So, let me know your thoughts.

Some ideas that get close: Bitcoin money, DNA analysis service (23andme), digital fashion for virtual worlds.

I’ve been arguing recently like others that QE2 isn’t really creating new banking money. Yesterday Ben Bernanke was interviewed and said the following (video skip to 19:00 mark) (h/t Pragmatic Capitalist):

What the purchases do… is… if you think of the Fed’s balance sheet, when we buy securities, on the asset side of the balance sheet, we get the Treasury securities, or in the previous episode, mortgage-backed securities. On the liability side of the balance sheet, to balance that, we create reserves in the banking system. Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed. Now the question is what happens the economy starts to grow quickly and it’s time to pull back the monetary policy accommodation. There are several tools that we have…: [he goes on to describe the use of short-term interest rate on reserves].

I generally agree with Ben Bernanke but with a small distinction: while QE isn’t creating money, it’s artificially maintaining an illusion that there is money, than there would otherwise be. Specifically, it’s forcing savers to invest in places that we would not otherwise invest because they are not really increasing real wealth productivity.

I view banks not as creator of money, but as intermediaries that lend credit to money so it becomes more easily acceptable: they liquify money rather than create it. The only reason we need banks is that we do not have an alternative decentralized infrastructure to efficiently liquify money created by the private or public sector. Efficiency here is measured in how low discounting cost of liquifying money is.

As Hyman Minsky said, “creating money is easy, the hard part is getting it accepted”. In other words, a private party – say a private business like a farm – can create money simply by issuing vouchers for their products/services, as is the case when a farm issues vouchers as part of a Community Supported Agriculture program. They don’t need anyone to create these vouchers, they only need confidence they can do good on their promise. The problem is that these vouchers are not easily acceptable because the cost of evaluating the ability of the farm to do good on their promise, and actually deliver the goods/services is high. Banks merely reduce that cost buy swapping these vouchers with assets that are more creditworthy, specifically claims on their own balance sheet. These claims are more easily accepted because 1) there are claims on a diversified portfolio of assets 2) because regulated banks promise to convert these claims in Federal reserve notes on demand.

The past 10 years have provided great empirical evidence that banks and the Fed are not necessary to create money: the shadow banking system created a ton of money by taking promises from the private sector, liquifying them by turning them into tradable assets via mortgage-backed securities, assigning good rating to them, so they would become acceptable in transactions, effectively turning them into money. These should have evaporated.

What the Fed is merely doing is artificially propping up the value of these debt-based assets to levels that they would otherwise not have. But they are not creating new money, they are just trying to keep the level of money in the economy at least constant or increasing.

Of course, this isn’t without issues. The main problem I see is that these actions are distorting capital allocation decisions. They give incentives for capital holders to allocate capital to assets that they would otherwise not invest in.

Real money should only be created when wealth productivity increases: for instance a farmer becomes more efficient and sustainable at growing healthy food that naturally heals people. Conversely, it should be destroyed when we realize that the wealth productivity increase were fake, for instance a farmer using petrochemicals to artificially prop up production of food that’s causing cancers and destroying land.

What can you and I do?

If you are a short-term speculator, it is important to understand that you can’t fight the Fed. You have to go with their illusion-making but be extremely aware that “debts that can’t be paid, won’t”, which means that at some point, the illusion will drop, likely in a dramatic way.

It’s better to be an investor, which means focusing on investments that represent real wealth for you, your family and your community. These are different for each of us, but to me they start with healthy food, safe housing, access to health and energy, and building relationships with other likeminded “investors” in your neighborhood and in the world. For instance, consider investing in a local farmer, equipping your house with solar or wind energy or investing in a sustainable energy cooperative, learning to share resources, organize and co-create with your neighbors. I would also recommend investments in companies dedicated to true increased wealth productivity: efficient/sustainable farming like aquaponics, robotics, renewable energy, sharing and trust networks, biotechnologies. In the short-term, while shady assets are propped by, your returns may be disappointing, but when the illusion disappears, you will find yourself in a much better position.

Also, if you are a software developer, an angel investor or venture capitalist, you need to invest your talent and capital in the Open Banking infrastructure i.e. the infrastructure that will facilitate the creation of liquid money within and across communities with similar values. This is critical to lessen the power of the Fed to artificially prop up assets that most of us pay for, but which create no tangible value to us.

[This is not an investment advice]

Gregory Rader asked me to clarify a point.

I essentially think that investing in something because of its actual outcome is a quite attractive value proposition.

I define a currency as a transferable promissory note issued by an entity/individual and backed by its productive/creative capacity.

Currencies can be used to fund projects that equity or debt wouldn’t.

Debt/equity requires a discounting of future market value, that is to say an evaluation of the sacrifice that people other than the investors will be willing to make in the future. This is especially hard in a credit money system where your ability to sell in the future doesn’t just depends on your ability to produce, but also on the phase of the credit cycle. In addition, for the sacrifice to be possible, the wealth generated must be rival, which further limits the creative potential.

Currencies on the other hand simply require the investor to know how much they will value the wealth created. They only require the issuer to produce/create what they promise they would create. Since they allow wealth creation to be funded upfront, rivalry isn’t a requirement. Much easier.