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Online Banking

I’m not sure what is going on in the UK but here in Australia online banking is the norm. I’d argue banks big and small are passionately pursuing digital innovation – something that keeps us all on our toes.

There are several drivers.

First, IT and particularly smartphone penetration is amongst the highest in the world. Banking has increasingly become a companion activity. We see this every night in our data. People sit down to watch TV and start paying bills and checking balances.

Second, banks here invested ahead of demand – especially CBA. Take contactless terminals – they are everywhere. In the US you will struggle to find them. What that means is ideas like tap-and-go payments made possible by Kaching suddenly have very broad appeal. We’ve also invested many hundreds of millions of dollars creating one of the most modern core banking platforms in the world. What this means is instant visibility into account status and real-time payments. This not only puts people in control of their money, but makes the digital world more secure and meaningful.

We are past the digital tipping point. A new world of banking is upon us – a world that will start on small screens everywhere. The key to unlocking this innovation isn’t dollars. They are important and they must flow at some point, but in reality they are realitvely small in the context of any Banks overal P&L.

The crux of the issue is culture. To fully capture the online opportunity any business needs to create a culture of innovation and entrepreneurship – one that harnesses their natural strengths in things like Risk and Security — and applies them to new challenges. THe culture needs to be based on “yes” principles rather than “no”. Most importantly, it has to be maniacly passionate about customer – about surprising and delighting them.

Once the right culture is in place and tested, innovations like Kaching and the CBA property app flow. Interestingly, culture is hard to replicate and hard to compete against.

It also makes for a pretty fun place to be.

3 Responses

  1. By Aleks Witko on January 18th, 2012 at 7:50 pm

    Interesting that we seem to be so ahead of the US. Could it be media-related? Our media is more monopolistic and culture less diverse than in the US. Perhaps we should compare ourselves to individual affluent states? California? New York?

    I was shocked at the online banking websites in the USA. Many banks are even still using paper application forms and the like :(

  2. By Ramesh on March 7th, 2012 at 8:27 pm

    that the bank would make up losses first with “cash on hand”.”Capital and liduiqity are distinct but related. The purpose of capital is to absorb unexpected losses. The purpose of liduiqity is to meet cash flow obligations. It happens that capital as a balance sheet item is also a source of liduiqity (as funding), but it’s not the only source of liduiqity in a leveraged institution.“Every bank with sound management will have a cash “buffer””Agreed but it won’t protect a bank in the worst form of liduiqity crisis due to insolvency.“The bank will need to replenish the buffer by selling stock or retained cash flow.”Banks issue stock and generate earnings to replenish their capital positions first. That also improves liduiqity as per my previous comment, but improvement of liduiqity is not the primary purpose of capital replenishment. There is a difference between a buffer against liability obligations (liquidity) and a buffer against losses (capital).“How do we know this buffer will be big enough to cover losses in practice?”The liduiqity cushion doesn’t cover losses. That’s what capital does.So in your actual example of a failing loan, the process will go ”It doesn’t go that way because I specified a liduiqity crisis that caused depositors to stay away. The bank may actually be insolvent, which is a condition of negative equity. But it only needs to be perceived as insolvent for there to be a liduiqity crisis.Under no circumstance can a “credit bank” run an overdraft at the Fed. As you correctly point out, this would defeat the entire point of the system.Agreed. “So I made a mistake in my original proposal in leaving out the part of the buffer.”I anticipated that by briefly noting the buffer scenario at the end (I should have spent more time on it.) The point is that in the worst case, a finite buffer cannot protect against a liduiqity crisis that is driven by actual or feared insolvency. It can only buy time, but time will run out in the worst case. That’s the point about the distinction between liduiqity and capital. So the credit bank must either go out of business or get an overdraft from the Fed. The latter is a contradiction because overdraft privileges aren’t provided.“There is no failure due to a liduiqity crunch, only due to major mistakes in making bad loans.”The root cause of the liduiqity crunch is real or perceived insolvency from a capital perspective (expected losses due to bad loans), but the failure mechanism – the death spiral is the actual liduiqity crunch and failure to repay liability holders.“If the economy was “pristine” from a credit risk perspective, i.e. no defaults or delinquencies, then there would be no need for a cash buffer account. In the real world, there will be substantial credit risk, and thus all sound banks will keep a cash buffer account.”My point was to demonstrate first a contradiction in the pristine case – that the credit bank required an overdraft. I then generalized it to a contradiction in the buffer case, where a sufficiently severe liduiqity crisis always overpowers a finite buffer. I recognize that sound banks from a liduiqity perspective carry a buffer, but that doesn’t prevent them from going down if real or perceived solvency (capital adequacy) is the underlying problem and that problem outlasts the finite liduiqity buffer. That’s why a system with “credit banks” can’t exist without overdraft privileges or it simply goes down at the first instance of a liduiqity crunch without the option of a temporary overdraft.“This is correct. In fact, a bank should never do this even as a temporary measure.”It’s finite by definition and therefore temporary by definition. No matter how large the buffer, it will not prevent a bank from going down due to the most severe solvency/capital real or perception problems. That’s generally how banks go down.The whole point of my piece was to present an example that juxtaposes a real/perceived credit problem against liduiqity resources that are finite by definition – pristine or otherwise. The two finite cases are zero buffer (pristine maturity matching) or non-zero buffer (technically a form of favourable maturity mismatching). Both cases produce a contradiction in that the credit bank needs a Fed overdraft in order to avoid going down due to its liduiqity crisis – it can’t repay its liability holders.Perception of credit problems is the cause of the liduiqity crisis in the examples; exhaustion of finite liduiqity is the mechanism. It always works that way in the real world, and it’s no different for credit banks as defined. That’s why the Austrian architecture fails. It can’t protect against the most severe liduiqity crises, as in the real world.“But in the age of the internet and global finance, I’d expect that borrowers would have a wide variety of choices available.”Interesting point on information; but the internet information itself doesn’t produce the stockpile of liabilities that is required before lending.It’s a difficult subject. We may be talking past each other a bit. My general observation is that it’s important to understand that the purpose of capital is to absorb losses. Liquidity management is not about absorbing losses. It’s about meeting required cash flows. These are separate but related issues. Liquidity crises are generally about the perception and/or reality of balance sheet insolvency or expected balance sheet insolvency (i.e. negative capital), or at least enough of a capital risk problem that people want to get their money out and not take the risk of hanging around. Capital is also a source of liduiqity in the sense of funding, but it is not the only source in a leveraged institution with liabilities. Those liabilities are not capital per se. They magnify the nature of a liduiqity crisis, just as they magnify or leverage risk taking in the first place. Only when an institution is 100 per cent capital funded (i.e. equity) does a liduiqity crisis blend perfectly into a capital crisis, because equity holders only expect to get the residual value of the firm out in the form of cash (i.e. liduiqity).

    • By Mithun on April 15th, 2012 at 6:55 am

      Community bankers aren’t neeasscrily lining up to take advantage of the recently launched Small Business Lending Fund, according to a report in The Washington Post. The fund, which was created as part of last year’s Small Business Jobs Act, earmarked $30 billion for banks with under $10 billion in assets to lend to small businesses.

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