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This is a personal blog. Although the authors are affiliated with Coda Payments, the views expressed here are their own.

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Monday
Mar042013

How Magic Johnson can help you to save

In my last post I wrote about Amex Bluebird, a product that walks and talks like a bank account but isn’t. Today I want to talk about another prepaid offering from the US, this one with a neat savings angle. Taken together, these services give a sense for the rich innovation that prepaid card regulation is supporting.

The MAGIC Prepaid Mastercard is issued by OneWest Bank in California and branded and endorsed by the former basketball star Magic Johnson. In many ways it is a standard prepaid card. Customers can add value to their account by making a bank transfer, asking their employer to set up direct deposit, or buy buying a GreenDot MoneyPak available at most large retail chains in the US. They get a debit card that they can use to make purchases at retail and online and withdrawals at any ATM.

The twist here is a feature called Magic Mojo that helps customers to save. The prepaid account is notionally divided into two, the “spending side” and the “saving side”, and customers are encouraged to establish a saving goal (“$1,000 for a rainy day,” for example). Then, anytime a customer saves money in the course of their daily life, they can send a text message to the bank in a standard format indicating how, and how much they saved: for example, “MAGIC 5 by skipping my afternoon Starbucks.” The bank will parse the message and then move $5 from the “spending side” of the customer’s account to the “saving side.” At any time, the customer can log into their online account to see how much they’ve saved and how they’ve done it. They can also at any time move money back to the “spending side” if needed, although they have to login on a computer to do so. In that way, it’s easier to save than to backslide. There are no fees for moving money into or out of the "saving side".

The other clever thing about Magic Mojo is its social component. Customers can choose a “savings partner” who will get a text message every time they contribute to their savings goal. And it works reciprocally, too. You can imagine a couple using this feature to save for a new appliance, or two friends to save for a holiday.

These features exploit much of what behavioral economists are learning about how we can best encourage people to save given our own cognitive limitations and biases. Making saving as easy (if not easier than) spending, being able to easily track progress to a tangible goal, and exposing one’s savings performance to peer pressure all help a customer who chooses to save to follow through.

Traditionalists will grouse that the “saving side” of this account is not technically a savings account and does not pay interest. To them I would say only that you are probably not the target market for this product.

The MAGIC Prepaid MasterCard is available only in the US, of course. But the technology that makes the on-the-fly and social savings features of Magic Mojo possible is SMS. So perhaps someday customers in the developing world will get access to similar tools. In the meantime it will be interesting to see how they resonate in the US.

Thursday
Feb072013

Will the next bank be a bank at all?

Before the holidays I wrote a post in which I briefly mentioned Bluebird, a new service from American Express that was launched last year in the United States. I believe the introduction of Bluebird will eventually be seen as watershed in the history of consumer finance, because it is the first credible alternative to a traditional bank account offered by a nonbank in the United States. This should unleash some salutary competition in a depressingly sclerotic space.

Bluebird was launched by an unlikely revolutionary: American Express, a venerable player in financial services. But it makes most of its money issuing credit cards to companies and high earners, and its management sought to diversify these revenues by offering a product for customers that might never qualify for an American Express credit or charge card, including the currently unbanked or underbanked.

Bluebird accounts are issued under prepaid card regulations, which have been around in the US since 1978. (Although American Express does own a bank—more on that in a minute—Bluebird is not offered by that subsidiary.) But Bluebird offers basically the same functionality that customers currently expect from their transactional bank account: 

  • You can make deposits by taking a photo of a check with your smartphone, by transferring money from another bank account, or, thanks to a distribution deal with Walmart, by cashing in any of their 4,000 stores. Crucially, customers can also arrange to have their paycheck paid into their Bluebird account using direct deposit.
  • You get a debit card to use to make purchases at retail and ATM withdrawals, and you can use Bluebird's online and mobile interfaces to pay bills. American Express is even working to allow Bluebird customers to write checks

So how is Bluebird different from a bank? Principally, the lack of branches. Amex can’t intermediate Bluebird deposits, so their accounts don't pay interest—but this is normal for basic transactional accounts offered by banks, too (I have current accounts with Citibank in both the US and the UK, and neither pays interest). Anyone with a more than a little savings in cash will want to move it out of a basic checking account and into a high-interest savings account offered by a specialist like Capital One 360 (known, before its acquisition, as ING DIRECT) online. As it happens, American Express runs just such a business itself, and surely Amex will eventually make it easy for customers to move money into and out of such interest-bearing accounts from Bluebird, just as it will probably start to mine its Bluebird account data to identify customers who could be cross-sold an American Express credit card.

I don’t know if Bluebird will succeed or fail. (I’ve been unable to sign up for an account because of an obscure problem verifying my identity, so I can’t speak to the user experience personally.) But I do feel confident predicting that services like it are going to give banks a run for their money. Because at the end of the day, customers don’t care if their “banking” needs are met by a bank or a nonbank—rather, they care about how well, and at what cost, those needs are met. Now that American Express has blazed the trail, I reckon there are many other nonbanks that will relish the opportunity to try beating the banks at their own game.

Sunday
Feb032013

Central Banks aren’t accountable—by design

One of the risks that banks and non-bank financial institutions alike must manage is the untrammeled power that financial regulators have to make or break their businesses. Of course, plenty of other sectors are heavily regulated; but central banks are unusually muscular, independent regulators.

It turns out there’s a good reason for this. The original function of central banks, and their most important role even today, is managing the stability of the national currency. By creating money or taking it out of circulation (achieved these days by manipulating interest rates), central banks defend against inflation. It turns out that this is highly susceptible to meddling from politicians, whose calculus is short term and who often seek to interfere with decision-making at central banks in an effort to goose the economy and, at the same time, their own popularity. In the long run this kind of interference is disastrous, because it can lead to dangerous levels of inflation. For this reason, it has become customary to charter central banks with a very high degree of autonomy, and central bankers jealously protect this independence to preserve their credibility in the eyes of the markets.

Over time, the mandate of many central banks around the world has been expanded to include regulatory responsibilities created by legislation (for example, supervising banks) and in many cases to financial policymaking. This evolution was natural: central banks were and are well positioned to understand the inner workings of the financial system given their interest in the role that financial intermediaries play in money creation.

But a problem has emerged. In democratic societies, we expect that policymakers will be accountable to the will and interests of voters. Normally, when governments delegate policymaking (rather than embedding it directly into law) they do so by bestowing such authority on government agencies. While this insulates the policymaking process from seedy business of legislative horse-trading, it still leaves technocratic policymakers exposed to the pressures of democratic politics, since they are situated within bodies that are ultimately headed by politicians or political appointees.

When financial regulation emanates from an independent central bank, no such pressure is brought to bear. And this is something to worry about. There are too many countries where important innovations are being kept from consumers by financial regulators. To take just one obvious example, the governor of the central bank in Nigeria has decided that he doesn't think that mobile operators should be allowed to offer payment services. Given the power vested in his office, he has been able to bar them from doing so without giving much thought to whether ordinary Nigerians want or approve of this policy.

In cases like this, I can’t help but wonder if outcomes would be better if consumers’ voices were heard a bit more loudly in the policymaking process.

Thursday
Dec202012

Joint ventures and misadventures, regulatory edition

Today in my Twitter feed I saw a number of links to a story indicating that the “Uganda Communications Commission (UCC) is partnering with Bank of Uganda to set new rules that will govern the Mobile Money trade.” The article doesn’t give specifics about how this is going to work, but it is emblematic of an emerging trend in which telco and financial regulators set out to regulate mobile money together.

Unfortunately, this is bad news, for a few reasons.

  1. In general, the only thing harder than getting a regulator to move quickly is getting two regulators to move quickly, together. This will be especially true given that, in every country I’ve worked in, these two regulators have radically different styles and approaches.
  2. Mobile money services are payment services, which financial regulators are competent to regulate. There is virtually no useful role for the telco regulator in such tie-ups, expect perhaps to help their colleagues understand a bit better how mobile networks operate (which of course they could do informally).
  3. The likely outcome of a collaboration between these two regulators is regulation that pertains specifically to mobile money. This is a mistake, because it means the financial regulator will have missed out on an opportunity to put in place more comprehensive payment system regulation that would support not just mobile money, but also other payment services, such as those that are card-based or offered by non-banks other than mobile operators.

Imagine for a moment (you will have to use your imagination, because I don’t think this has ever happened) that a bank decides it wants to get into mobile telecommunications, either by becoming an MNO or an MVNO. Would a special collaboration between regulators needed in order to oversee this novel arrangement? Of course not. The bank would need to apply for a license from, abide by the rules set out by, and submit itself to oversight from the telco regulator, in addition to its pre-existing obligations to the banking supervisor.

A less hypothetical example is Starbucks in the UK. When Starbucks wanted to get into payments, did the FSA need to draft special regulations in collaboration with the coffee-shop regulator? Of course not. Starbucks simply applied for an e-money license from the FSA.

I could go on, because this is kind of fun (what if a pharmaceutical company wanted to offer insurance? What if a cigarette company wanted to start drilling for oil?), but I think the point is clear. Mobile money is just another payment service. That it is offered by a company that is in another regulated business is not a good enough reason for create a cumbersome regulatory superstructure to oversee it. 

Tuesday
Dec042012

The myth of safe banking

There is a pervasive assumption, implicit in many of the debates around the emergence of new financial services, that banks are paragons of stability and that deposit accounts are the gold standard for safe storage of value. After all, banks are heavily regulated, they have giant compliance and risk-management functions, and they are conservative by nature. What better place to store your money?

But this intuition gets the causation exactly backward. Banks have injected caution into their DNA and are subject to extensive prudential regulation because their business model is so risky. Banks accept short-term deposits and make long-term loans, rendering them constitutionally incapable of honoring a large number of withdrawals simultaneously. This is the worm in the bud of the fractional-reserve banking, and it haunts banks (and occasionally entire banking systems) during times of crisis.

You might think bank runs are largely a historical phenomenon. Actually, in America alone, a bank fails every week or so. You don’t hear about it the regulator has gotten very good at winding up banks (they can do it over a weekend), and because depositors are protected by insurance.

Now there have been howls of objection from those in the traditional banking industry that customers of Bluebird—a prepaid debit account offered by American Express in the United States—do not benefit from federal deposit insurance. Deposit insurance, they imply, is what distinguishes safe checking accounts from unsafe stores of value.

But again, this gets the logic backward. Deposit insurance emerged as a way to protect consumers from bank failures and to make such failures less common by reducing the incentive of individuals to participate in a bank run. As with any other form of insurance, deposit insurance protects against risk—in this case, the riskiness inherent in storing your money with an institution that is going to lend the vast majority of it to someone else. Were deposits risk-free ways of storing money, deposit insurance would be unnecessary.

For centuries, we have tolerated the fundamental instability of the fractional-reserve system and done our best to contain the risks associated with it. This is because our economies would grind to a halt without financial intermediation, of which banks are traditionally the engines. But just because you rely on something doesn’t make it safe.