Beyond Mobile Banking – A List of 6 Ways to the Future

ING World Q12016

Financial markets are in turmoil and many economists are miserable about growth prospects. But tell this to the fintech world. The outlook for mobile banking has never been brighter. Its adoption has been much faster than the internet banking that preceded it. It’s so irresistibly convenient. And there’s far more to come. Here’s six ways it could develop:

  1. Advice

Right now mobile banking is very transactional. Most mobile banking apps allow you to pay bills, make payments, transfer money, check your balances or find a branch or an ATM. Some offer fancier analysis of your finances or more product information, but it’s largely functional, generic and task orientated.

This is all set to change. Financial innovators are working on turning your mobile phones and tablets into virtual digital advisors. Mobile banking will move beyond the transactional, product-pushing approach to one that is radically customer-centric, pro-active and goal-oriented, aimed at helping users make smarter decisions.

ING’s International Surveys of consumers show that they have a strong appetite for this. In a survey last year, 85% of European consumers said that their money management had improved because of mobile banking.

Mobile Banking - a change in managing finances (2)

To build on this demand providers will need to develop a much deeper understanding of their users, beyond the merely financial. What are they trying to achieve in life? Their account balance and past transactions will only provide a few clues.

So providers will have to provide richer interactions with their clients to learn more about their motivations, and make intelligent inferences from the behaviour of people with similar profiles. They will also have to draw upon third-party data sources to build more complete pictures of individuals and their families, friends and social networks.

The beginnings of this trend can be seen in the market for investment products, with the launch of ‘robo-advice’ services. These offer portfolio-management tools, with automated advice based on data users provide, such as online risk-appetite evaluations. For example,  younger, risk-tolerant investors will typically be advised to put a bigger proportion of their portfolios into equities, for example.

For providers and users alike, the mutual cost savings on relatively large investment transactions make them an attractive place for robo-advice to start. But there is scope for the trend to extend into the full range of financial decisions, even to mundane daily shopping transactions. Ever more efficient systems are commoditising the payments business, so the search is on, by banks and fintechs alike, for added value services around the payments business.

Here the big prize for banks is to do more than merely executing the payment. What if they could use their knowledge and data to make help you make a better choice?

Big transactions, like buying homes or cars, are months, if not years, in the planning. Right now, banks are generally only involved at, or near, the moment of payment. But with their transactions data and expertise, banks could step in to help users search, building on the experiences of millions of other customers.

Even with smaller transactions banks could play a more active role in providing tips and tools to help, given their role at the heart of the payments system.  Indeed, they could embed themselves in the whole transaction journey of searching, buying and, in some cases, use (think of feedback and reviews on purchases). As a result, they would be involved not just in the ‘how’ to buy, but the ‘why’ (“do I need this?”), ‘what’ (“which product should I buy?”), ‘when’ (“should I wait?”) and ‘where’ (“who’s offering the best deal?”).  The obvious question is: would users want this? The short answer is yes, so long as they found it useful. That usefulness will be enhanced by the other emerging fintech trends.

  1. Access

The banks’ mobile apps typically focus only their payments and savings accounts. Most people have other financial products and have money, savings, loans or investments with other banks or providers. The result is that most bank apps only give a partial picture of individuals’ finances, which presents an obvious problem for their aspirations to deliver digital advice.

So the next big trend is ‘aggregation’, combining people’s financial data from multiple sources to build up and analyse a holistic picture of their finances.  You need to know your total income and spending, the value of your loans, savings, investments and assets before you can make reliable plans and budgets. Some providers have started tackling this challenge, which faces formidable legal and IT hurdles, but the enormous potential value to users suggests that it will ultimately be met.

In effect, banks will have to rethink their business models, moving beyond the aspiration of being the single multi-product provider to their customers to offering value-added platforms for customers to access and manage their finances, whatever the source.

But why stop at financial products? Having built a complete financial platform for their clients, banks could also provide access to the purchase of other products and services. Many banks are worried that the likes of Google and Amazon might move into financial services and “eat their lunch”. But by providing access to multiple online marketplaces, big banks, who after all have huge customer bases, could take the game to the tech giants.

  1. Affective

This brings us to a third direction for mobile banking development. While the adoption rate of mobile banking has been near-exponential, it’s not an activity that takes up more than a few minutes of the three-hours-plus a day that many mobile users are spending on their devices. It’s functional, even boring. But it doesn’t have to be.

Indeed, if banks aspire to become omni-present trusted advisors, they are going to have to build a much deeper emotional connection with their clients. Financial transactions may not be fun (although people do get a buzz from bagging a bargain), but the spending goals that lie behind them are often emotionally engaging. Think of the excitement around buying an exotic holiday or a present for a friend

Financial decisions are woven into people’s lives, so people’s feelings and emotions need to be taken into account. The new field of ‘affective computing’ is already making progress in developing sensors to do so.  Combined with the insights of behavioural economics, which has discovered a wide range of psychological biases that deflect us from the coldly rational calculations of traditional economic theory, this could lead to much smarter devices. By learning from your moods and  behaviour and that of those like you, they could help you make decisions that are not just more cost effective, but more satisfying; ones that not just avoid mistakes, but also lead to success.

  1. Associative

Talking of satisfaction, people derive happiness largely from interactions with others. We’re social animals.  Most household financial decisions are driven by the needs, interests and reactions of other members of the household or family. We care about the reactions of our friends, neighbours, colleagues and peers. Yet mobile banking apps are still locked in the private world of you and the bank. So there’s huge scope to make mobile banking more social.

This is not to say that people are keen to share their financial secrets with one another. They’re not. However, facilitating intra-family and intra-household goal setting, budgeting and transfers would be a good place to start. In the new world of virtual digital advice, people may be happy to share their wish lists, tips and tricks, reviews and experiences with others. After all, people trust their families and friends more than companies.

Preserving privacy and security will be a precondition here; this will also depend on users opting in only to the features that they want and personal data being protected or anonymised by aggregation.

Now you might be thinking,  aren’t existing social networks like Facebook better placed to do this? Perhaps. But the banks, for now, do have some advantages, . They have millions of customers, even if they have barely begun to connect them into on-line communities. They have financial data, on incomes as well as transactions, that the social networks and tech giants might die for. They also have the lead in expertise in cybersecurity, credit evaluation, and financial planning.

Think of the possibilities. On savings, for example, most people have particular goals in mind, such as buying a car. Within their client bases, banks have ready-made communities of potential car buyers, who could share thoughts about which cars to buy, where to buy them, how to maintain and insure them.

Or think of the trend towards crowdfunding. Banks could facilitate the development of platforms for all forms of peer-to-peer finance. Existing joint ventures with P2P platforms hint at a future of more collaborative finance.

  1. Agile

A fifth direction for mobile banking is to become  more forward-looking and dynamic. People appreciate the new 24/7 convenience of mobile banking, but it’s all a bit static and backward looking.

By harnessing ‘Big Data’ about users and applying the tools of predictive analytics, banks are already starting to provide more sophisticated alerts about their clients’ finances. Looking at their typical spending, for example, they can be warned that their account might be about to slip into overdraft.

Eventually, these personalised micro-economic forecasts might stretch into the longer term,  such as  indications of future utility bills or the ranges of potential savings returns. Indeed, such personalised forecasting is essential if mobile banking morphs into financial advice, because all borrowing, saving and investments require a view on the future.

The transformation towards holistic advice will also require even higher frequency contact with users. Although mobile banking has already multiplied the number of contact moments between clients and their banks this has much further to go. Rather than being event-driven, or merely reporting to or alerting users, finance will become more interactive, immersive and engaging.

In the background, the virtual adviser will have to remain ‘always on’, scanning for opportunities and threats to its users. In the process, users, like their devices, will learn as they go along about how to make smarter decisions .

  1. Ambient

The notion of an adviser ‘always on’ suggests that the ultimate direction of mobile banking will be to free itself from dependence on mobile devices such as the app-driven smartphones and tablets that we are familiar with today. The development of cloud-based computing, artificial intelligence and the ubiquitous sensors of “the internet of things” open up the prospect of ‘ambient computing’. In the coming decades, we might migrate to an electronic environment that recognises our presence, senses our situation, anticipates our needs and responds to our commands.  Let’s just hope that the ambient financial advisor figures out a way of handling financial market turmoil…

An edited version of this post appeared in ING World

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21 Lessons from the Greek Crisis

 

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The refinancing deal struck on 13th July between Greece and its Eurozone partners left everyone bruised and unhappy. While it staved off the immediate threat of yet greater chaos from Greece being forced to abandon the euro, doubts remain as to whether the deal will succeed. So what are the lessons to be learnt?

  1. The creditors remain in charge. The radical left-wing Syriza-led government in Greece gambled that its international creditors would be so worried about the potential damage from a “Grexit” from the Eurozone that they would grant it softer terms on another bailout. It was wrong. Despite securing a strong ‘no’ vote in a last minute referendum on a package requiring it to deliver on reforms and further austerity measures, Syriza ended up having to capitulate to an even tougher deal.
  2. Politics trump economics, at least in the short run. At times the numbers in the fiscal plans that the Greeks were proposing were very close to those suggested by its creditors, but the confrontational tone of the debate made it hard for politicians on either side to sell the deal to their voters.
  3. Trust matters. The negotiations became acrimonious, and violent swings in bargaining positions (particularly from the Greeks) got in the way of striking a deal. In the end, trust is essential in any financial transaction. Sadly, given the Greek Prime Minister Alexis Tsipras criticised the deal as ‘blackmail’, mutual mistrust will persist.
  4. Don’t rely on economic forecasters. Forecasts on the outlook for Greece, not least from its creditors, have repeatedly been woefully optimistic, drastically underestimating the damage to growth from budget cutbacks. Only a little over a year ago, the International Monetary Fund was forecasting that the Greek economy would grow by 4% in 2015, now it looks like shrinking by the same amount.
  5. Severe austerity has a political price. Syriza’s support sprang from the depression in the Greek economy, which sent unemployment soaring to over 25% of the work force. This has bred resistance to further fiscal restraint.
  6. The more essential reforms become, the harder they may be to implement. The wrangling over the last few months has inflicted more damage on an already weak Greek economy and fuelled a toxic political climate. Intrusive surveillance of reform implementation by foreign creditors may be required, but is likely to meet with hostility.
  7. Just because an economic strategy has failed, it doesn’t mean it won’t continue. The combination of severe fiscal austerity and lack of reform has seen Greek government debt rise rather than fall. More austerity, in the shape of spending cuts and tax rises, has already been agreed, but it is not clear how far the pace of reforms will pick up.
  8. Make sure that you have an explicit and credible ‘Plan B’. Former Finance Minister Yanis Varoufakis claims that Greece, if it failed to get external finance, had a secret ‘plan B’ to introduce a temporary currency linked to the euro. But with the banks closed and the economy struggling, the creditors believed that Greece had either to accept its terms or face an economic meltdown. Other populists elsewhere in the Eurozone will have to reflect on this before eyeing the Euro exit door.
  9. Game theory is tough to apply in practice. Varoufakis, an expert in game theory, lost out on this one. Not only is the Eurozone a multi-player game, with each player having distinct motivations, it is also a multi-period game, rather than a one-off game: you have to recognise that other players will remember how you behaved before, and act accordingly.
  10. There are deep-seated differences in thinking within the Eurozone not just on politics, but also economics. The debate over Greece laid bare old divisions. On one side there is a German-led hard core emphasising rules, discipline and austerity and on the other the softer camp led by France and Italy advocating solidarity and growth.
  11. Fiscal union is a distant prospect. There is little appetite to share economic burdens across the Eurozone. As a result, the original vision that European monetary union would be bolstered by a system of fiscal transfers from the richer to the poorer members looks further away than ever.
  12. The Eurozone will continue to have a deflationary bias in the event of future debt problems. Debtors will be expected to deliver on budget cuts, with no matching expectation that creditors will offset this with fiscal stimulus measures.
  13. Generous welfare systems will continue to be under threat. Drastic cuts to public spending in Greece, with pensions being a particular target, will send a message across Europe. The young will have less secure financial futures than their parents.
  14. The Euro is no longer irreversible. German Finance Minister Schäuble’s public advocacy of a temporary Eurozone ‘time out’ for Greece – for which there is no provision in its founding Treaty – has opened the door to future speculation that members could leave. This creates a precedent that may come back to haunt the Eurozone.
  15. Without growth, Greece will struggle to repay its debt. There are plans to help with EU-backed investment programmes, but these are relatively small and are unlikely to be delivered until Greece delivers on austerity and reform measures.
  16. “Kicking the can down the road” makes it bigger. Eurozone creditors remain reluctant to write-off Greek government debt, as advocated by the IMF. While politicians attribute this to Eurozone rules, it stems more from fears of a voter backlash if they acknowledge losses on loans to Greece. The strategy of lowering interest rates and lengthening the payback period on the debt – ‘extend and pretend’ or ‘reprofiling’ – is less embarrassing than partly writing off the debt, but is likely to prolong the agony.
  17. Interest rates will remain low. Monetary policy will continue to carrying the burden of supporting economic growth. The European Central Bank will have to persevere with its programme of bond purchases (‘quantitative easing’) to hold down long term interest rates.
  18. The euro will remain a weak currency. While the ECB is set to be locked in to keeping interest rates low, the US and the UK are set to raise them in the next few months, driving the euro lower still.
  19. The rest of the world will have to live with weak demand from the Eurozone. Although the recent hiatus in Greece may prove only a temporary blow to the recovery across Europe, economic growth is likely to remain lacklustre. Moreover, the weak euro will continue to make it hard for exporters to the Eurozone.
  20. Exports will continue to be the bright spot for Eurozone companies. Producers in the Eurozone have benefited from the falling euro, which is making prices more competitive on world markets. The relative buoyancy of the US and the UK is also helping.
  21. Don’t make important financial decisions at night. The sight of bleary-eyed politicians announcing a deal at 7am after sixteen hours of negotiations should serve as a warning…

This post also appears in the latest edition of ING World

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Globalization Disrupted : Will world trade continue to disappoint?

Since the onset of the financial crisis, world trade is no longer growing twice as fast as output. I examine the reasons behind this in this presentation, an updated version of one produced to support a panel debate at a trade finance conference in Chicago last month. Although many commentators expect the headwinds confronting trade to continue, there are important offsetting factors in the longer term. The key points are as follows:

  • Growth in the developed markets is slower, reflecting sluggish domestic demand…
  • …especially in big deficit nations, which are trying to emulate Germany’s export success…
  • …with varying degrees of success – US and Spain have done well
  • Offshoring and re-imports have waned
  • Disruptive technologies may also reduce trade in the long term
  • But there could be positives from…
  • 1. Further Trade liberalisation.
  • 2. Offshoring : the spreading of Western FDI away from China to other low cost countries
  • 3. Offshoring by Chinese companies that want to produce close to their Western customers
  • 4. New energy flows, especially from the US
  • 5. A policy shift to boost infrastructure
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The New Abnormal

It’s remarkable how pervasive ‘New Normal’ thinking still is, despite innumerable economic and financial market shocks. Forecasters continue to assume that the global economy will gravitate towards low but stable growth, regulators still aim to deliver a more stable financial system, and central banks keep aspiring to ‘normalise’ policy after years of radical improvisation. Yet, as I argue in a report entitled ‘The New Abnormal’ such thinking is in for a few surprises. The world is still far from any sensible definition of ‘normal’.

The idea of a New Normal glosses over several sources of instability. The New Abnormal is characterised by on-going structural changes that extend beyond the decade-long challenge of reforming the financial system. Economic policy is unbalanced, with monetary policy forced into the role of supporting economic growth in the face of headwinds from fiscal consolidation and tightening financial regulation.

Sadly, unconventional monetary policy interventions, such as quantitative easing, have enjoyed more success in boosting asset prices than economic growth. As a result moves to ‘normalise’ interest rates could turn out to be much bumpier than the markets expect. As a result, there is a serious risk that financial market volatility will spill over into the real economy. Indeed, market volatility and weak growth could easily become mutually-reinforcing. To the extent that central banks recognise this, this will make the road to higher rates as much ‘market dependent’ as ‘data dependent’.

Meanwhile, the reluctance of policy-makers to embrace growth-enhancing fiscal and structural reforms is deterring the investment that could stimulate a surprisingly robust upswing in the longer term. The upside of the volatility of the New Abnormal, in contrast to the fashionable miserablism of the New Normal crowd, is that there is potential for positive surprises in the longer term. As I’ve argued before, a host of new technologies offer the potential for positive network effects and answers for the demographic challenges to global growth. But it remains to be seen whether the shock of another recession will be required to trigger the shifts in economic policy that might give business the confidence to embrace that potential.

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US triumphs in the World Economic Cup

Economic Cup 02 (2)

The legendary manager of Liverpool, Bill Shankly, once said, “Some people believe football is a matter of life and death… I can assure you it is much, much more important than that.” I’m tempted to agree, but sadly I get paid to analyse economics, not football. As countries start to compete on the football fields of Brazil, I thought it would be fun to see how they are competing against one another economically. So who will win the World Economic Cup in 2014? Based on analysis by the ING Economics team, I would say the USA.

To get to this momentous result, we took a range of indicators to assess how twenty of the leading nations competing in this year’s World Cup have performed since the last competition in 2010. How fast did they grow? Did they reduce unemployment? Did they improve their competitiveness and exports? Did they reduce their unit labour costs? .

Economic Cup 03

Ranking their performance on the basis of these five economic criteria ( based on data from the IMF, EIU and World Economic Forum), and then combining them into a single index, we came up with a league table. The USA came out on top, alongside Mexico. Interestingly, two more countries from the Americas, Chile and Brazil, feature in the top five. For football aficionados, this is a pleasing result, because in each of the seven occasions that the real World Cup has been held in the Americas, a team from the Americas has won (for the record, the winners were Uruguay, Brazil and Argentina).

In fact, the only European team to feature in the top eight is, you’ve guessed it, Germany, at number three. The Netherlands and Spain, two great footballing nations, barely scrape into the top ten, alongside Russia. England, represented in the World Economic Cup by the UK, comes in at number 13. This puts it just ahead of the remaining European competitors, who dominate the bottom of the table, which is propped up by Nigeria. Clearly the Eurozone crisis has weighed on the economic performance of Europe in the past four years.

Economic Cup 01

To see how these economic rankings would look when translated into the knock-out format of the real World Cup, we put each country into the Groups drawn for this year’s competition. Sadly, on this basis, The neither the Netherlands nor Spain make it out of Group B, because they have the misfortunate of being in the same Group as the more highly economically ranked Chile and Australia.

In the table below, each game is won by the team with the higher economic ranking. As a result, hosts Brazil lose out narrowly to Chile in the second round. Chile then beat England in the quarter final, but then go on to defeat against Germany in the semi-final. The other semi final is between the USA and Mexico. Since they have identical rankings, we decided to have a ‘penalty shootout’ based on the performance of their stock markets since 2010. The USA emerges as the winner, and then goes on to beat Germany in the final to win the World Economic Cup.

Economic Cup 02 (2)

Now you may be wondering, where would China fit into this story? Well, China is not in our World Economic Cup because it failed to qualify for the real thing. But, despite its rapid growth, China would not have won the Cup, even if it had qualified: its economic ranking is let down by its scores on competitiveness and unit labour costs. Indeed, it would have lost to Mexico in the quarter final.

With all due respect to Bill Shankly, like football itself, our exercise is hardly a matter of life and death. But there are still some important lessons. The performance of countries in Asia and the Americas show how rapidly the list of winners and losers can change. Meanwhile, it is clear that Europe’s economies are paying the price of the Eurozone crisis. Yet despite this, Germany’s economy, like its footballers, can never be counted out. This is something to emulate. But, thankfully for the rest of us, whether in business or in football, Germany can still be beaten.

(With thanks to Anke Martens)

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By Accident or Design – Optimism from a Dismal Scientist

> I recently spoke at a conference in Santa Monica California organised by the Design Management Institute entitled Designing the New Economy. Tired of being miserable, I decided to take on the fashionably gloomy view of the long term outlook. My presentation was entitled By Accident or Design – Optimism from a Dismal Scientist

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> While the devil may have the best tunes, the more I thought about it, the more the optimistic view began to appeal. After all, economic forecasters have hardly covered themselves in glory in the past. Indeed, few saw the financial crisis coming, so why should we take as read the new consensus that the West faces a Japan-style lost decade or two? The current pessimistic funk could prove just as misplaced as the self-congratulatory optimism that preceded the crisis. This is not to deny the current headwinds from debt deleveraging in the developed world. But they won’t last forever, and a growing list of exciting new technologies could spark a surprising surge of growth in the longer term. Economic reform and trade liberalisation are on the agenda, This is especially remarkable in the face of high unemployment, which makes destructively nationalistic options tempting. Emerging markets still have a lot of technological catching up to do, and despite occasional reverses, their economic governance is still on an improving trend.
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> The attached presentation (click here for the long version) summarises the case for optimism with the following twelve points:

> 1. Dismal economists are too pessimistic

2. Policy-makers are learning, by trial and error, and austerity won’t last forever

3. Crisis is shifting resources to more productive uses

4. New ways of financing are developing

5. The list of potentially disruptive technologies is impressive

6. Connectivity is still in its infancy

7. Network effects promise accelerated learning

8. Technology will create jobs as well as destroy them

9. Emerging markets still have a lot of catching up to do…

10. …and will fuel demand

11. Developed world still has leadership in design and technology…

12.  …which can drive growth and trade

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Draghi’s confidence trick is working a treat

Over the last few months there’s been a dramatic turnaround in capital flows to the Eurozone’s periphery, illustrating the success of ECB President Draghi’s rhetorical flourish last summer to do “whatever it takes” to support EMU. Today’s Financial Times carries two articles featuring ING’s number crunching on this topic, including elements of one of my current favourite charts (click here: Eurozone Balance of Payments).

The chart underlines the point that volatile private capital flows are the driving force behind the performance of the euro and the Eurozone financial markets. The other side of the balance of payments, namely the current account, has been improving since 2010, at least in the sense that the deficits of the periphery (Italy, Spain, Portugal, Greece and Ireland) have been declining. The problem is that while this has partly been due to growth in their exports,  it has also been due to falling imports as their domestic demand has plunged. That plunge in turn continues to threaten the periphery’s solvency by undermining their capacity to cut their budget deficits.  

Indeed, that’s precisely why there was an emerging market style capital flight of out of the likes of Italy and Spain in the first few months of last year, as fears of EMU breaking up mounted. This is vividly illustrated in the chart, which shows an exodus of private capital, equivalent to almost 20% of the periphery’s GDP,  in the first eight months of 2012.  Draghi’s verbal intervention in late July, followed up by September’s offer of “outright monetary transactions” to support the periphery’s government bond markets, came just in time to avert disaster. Since his comments, private capital has been flowing back into the periphery, albeit initially at a slower pace than it left: on our estimates the influx of €92.7bn in the final four months of 2012 was the equivalent of just under 9% of GDP.

The markets’ strong start to this year suggests that Draghi’s confidence trick may be gaining momentum. The trick seems to be working a treat. But unless the markets’ optimism starts to translate into stronger economic activity over the coming months, and politicians use the current breathing space to make progress on banking union and other moves towards integration, the treat may turn sour.

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