Monthly Archives: June 2015

The Power of Control

http://continuations.com/post/122336558130/apple-on-privacy-what-about-limits-on-general

As the High Net Wealth Individuals’ (HNWI) wealth grows substantially quicker than the rest of the population (http://www.ritholtz.com/blog/2015/06/hnwi-populations-statistics/), the question of control springs to mind. How much control (economically as well as politically) do these individuals hold? On a related topic: as unanimously agreed by everyone, big corporations continue to get larger. I’m sure there is a direct correlation between HNWI and Big Corporations (shouldn’t have to even mention it really) but on the topic of control ‘they’ have a not-so-hidden power to allow us to use only what ‘they’ want us to use. In the case of Apple, the selling point is quality control:

 “Imagine buying a car but having the car maker retain control over which roads you can drive on. Looking to go down that small road to the beach? Your car just won’t move. I think very few people would find that an acceptable limitation on how they can use a car, which after all, they have paid for. In the case of software, the limitation is less obvious. After all, you can download apps from the App Store for seemingly everything (“there’s an app for that”). But the second you dig a little bit you realize that Apple had and is exercising all sorts of control, including for example what ecommerce experience you can have, how potentially offensive content is treated and what you can do with crypto currencies.”

There is a similar argument over why Google should not be allowed to “hide” or move search results, as the results drastically affect who sees what links. Imagine looking up doggy-day-care services in your home town and only seeing the results of PetCo (or whomever, I don’t have a dog) and missing out on that great local business right in front of your apartment because it was link #8 or on page 2 (even page 4!). I rarely go beyond the first page of my Google results, expecting to find what I’m looking for at the top, or making due with the results. This type of control is the same argument that some proponents of the Open Internet use against the big telecoms and the Comcast/Time Warner merger! And if I recall correctly, the FCC determined that telecoms cannot exert their power of control to favor different types of services (such as Netflix—even though they still do, just not in Netflix’s favor for the sake of their own cable subscription services), and the merger failed! What makes control different between consumer goods and the services we use?

 

I know that consumers have the power to vote. And they use that power every single day. With every single dollar that consumers spend, they vote on who or what they believe deserves their money (and thus, power). It’s probably just more effort for some than they want (read: people are lazy and don’t care enough).

Future of Personal Consumer Finance

I’ve talked about it before, several times actually, but I believe that despite what the experts and futurists think, our big banks will continue to be pillars of our economy. There’s been a lot of talk within the last few years about banking moving from in-person branches to online-only services. With the meteoric rise of companies like Lending Club (consumer and currently small-business loans) and the huge press that goes to Robinhood (“free”, “no-fee” stock brokerage), GoBank and Simple (“free” online banking) it’s easy to make these conclusions. But, from the perspective of business strategy, the big banks will continue and perhaps grow even stronger from the added (and primarily digital) competition.

For now, I’m going to separate Lending Club from the pack and focus on the personal checking type banking side. I think Lending Club has a great business and massive amounts of potential, but they compete in a different landscape where revenue comes in the form of interest payments, one-time fees, and consulting services; for large banks I’d imagine a healthy profit comes from this segment of the business, offsetting some of the losses from the personal checking accounts. The other side of the business generates revenue through a few pieces: interest on the cash in the accounts (the bank invests the cash you leave in your checking account, pays you a small interest rates, and keeps the spread), various fees from activity/inactivity (such as monthly/annual fees, check-writing fees, wire transfer fees, withdrawal fees, etc.), and transaction fees (when you use your debit card at the store, when you withdrawal from a non-network ATM, etc.)

By their nature, the online banks don’t have the overhead current banks such as Bank of America and Wells Fargo have since they don’t have physical branches and only need to hire support staff (which can be done cheaply and remotely) and technology staff (the ones that test and develop the software). As far as revenues, I’d expect online banks to have roughly the same structure with some “marketing” alterations. GoBank, for example, promotes the “pay-what-you-want” fee structure where you can elect to pay a monthly/annual fee if you deem the service worthy.

With all “free” services though, it’s safe to assume that if you don’t pay for the product you are the product. GoBank (and I’m sure many others do/will) sells your transaction data to marketers and makes (or will make) a significantly shiny penny off of advertising revenue. This is something I’ve discussed before, banks hold a wealth of information about you, perhaps the most information of any service you use and perhaps the most value information of any service you use. They not only know your personal information (due to the Patriot Act they now require physical address and possibly a copy of your driver’s license), they know where you spend your money, how you spend your money, how often you spend it, where your income comes from, and who you share money with. The primary advantage of this type of data is that, while other services such as Facebook know what you like, in this case they know what you actually spend money on. You may like Rugrats on Facebook, but you’d never spend money on them. Banks know this, Facebook does not. This type of information requires the highest levels of privacy and it’s something I worry that the future of banking will pursue. If they didn’t have the profits of other departments (such as credit cards and loans), I’d bet the large banks would already have begun to sell this data, if they haven’t already.

With privacy concerns in the forefront, large existing banks have other advantages that new incumbents will surely find difficult to replicate: other revenue streams. Banks can offset their losses in multiple areas with profits in other areas, and do this on a daily basis. If their investment banking arm has a bad quarter, it is typically offset by something like auto loans. Smaller “digital” rivals don’t have this and one bad quarter in personal checking accounts can lead to ruin. Large banks can take advantage of this and let the little folk test, try, and fail with their new product offerings, eventually replicating successful services at no start-up cost with a massive existing customer base.

I’d say this argument should work 90% of the time, but let’s consider services such as PayPal and Venmo (both arguably successful) who have established themselves out of nowhere. This MUST be seen by the large banks as total failures on their part. I believe they got lazy and should have squashed the competition before they got big. They’re all now (a bit late in the game) reacting by offering digital wallet/payment services, mobile transfers (still slow to develop), and email transfers (very slow to develop). Their size, while a valid argument, may play a part in why the large banks fell behind, but I don’t buy it. An essential part to any company is their ability to innovate and R&D should always be a part of their business. I believe they realize this, better late than never, and will come out stronger by year end.