Cell Phone = Payment Device?

The evolution of services offered by the banking industry has always been reliant on available technology and the creative methods that institutions use to implement it into their products. The consumer banking industry is full of monotonous offerings of comparable services so being the first to phase in new technology is often the key to one institution setting itself apart. Visa has been in the press lately for its interest and research in incorporating the expanding capabilities of mobile devices into its consumer product offerings. Other banks have also set their sights on the potential that this field has on increasing consumer demand for mobile banking but they all face the same challenge of the implementation. 

Elizabeth Buse, the Head of Product at Visa, announced last month that said company has analyzed the practicality of various mobile banking solutions in several markets, weighing the advantages of using mobile devices as a replacement for debit or credit cards against using them as a supplement to the existing card infrastructure. They announced that in the United States, because the card system is already so vastly implemented in retail locations, it will focus on creating applications to bring up-to-date information to consumers that will not include “contactless payment capabilities.” Visa, US Bancorp, and other financial institutions have said that they are working with Google to bring such applications to the Android mobile operating system (recently introduced and currently only available on the US T-Mobile network) because of its relatively open system for developers.

The applications give consumers the ability to subscribe to alerts concerning their accounts, locate banking centers and ATMs in the vicinity, and to subscribe to offers from participating retailers that they may come into contact with. Some banks have begun offering these abilities. Personally, I am a customer of Bank of America, which has already developed applications for my phone that allow me to do these things and more.

I think that given the situation of the economy right now, these are useful additions. Mobile alerts will prevent consumer credit from getting out of hand by sending notifications when spending exceeds a given amount. Instant fund transfers from any location on a mobile device will allow people to mobilize and better manage their spending. With more than a quarter of a billion mobile subscribers in the US, mobile banking technology is bound to attract customers and we will continue to see developments. After the industry settles down and the rapid buying and selling of banks slows (and the Wachovia tug-of-war ends, etc.), we will have banks once again looking to technology to stand out and attract crowds.

Jackson, Ben. "Visa Questions Phones as Payment Tools" American Banker [New York, N.Y.] 8 Oct. 2008.

Tech Companies Affected

Due to the rapidly changing economic situation, many businesses are looking towards areas where they can reduce or cut spending. One place that firms seem to be cutting costs is in IT expenditures. The market for technology is one that many have thought would remain relatively unharmed by the economic downturn. This is because advances and upgrades in IT typically mean more efficiency and profits. However, according to the article under Best of the Business Tech Blog, the technology industry is not immune to the downward spiraling markets.
The article highlights the German software company SAP as a warning sign to the tech industry. The company is expected to report lower earnings for the third quarter than previously estimated. This is because the technology industry is a services based industry, and while they may have been performing well, their clients in all industries are being adversely affected by current market crisis. It was also thought that the industry would not be largely affected by the economic crisis because of the nature of tech companies cash reserves, which tend to be rather large, I would assume for the facilitation of research and development, and because tech companies do not need to borrow much money since cash is readily available.
The article points out that the budgets that companies have allocated to technology are usually fairly limited to begin with, so it is not going to be the first place that they look to when trying to cut spending. However, in the changing market, previously held outlooks must also be adjusted and even overhauled. The article brings out that a staggering “61% of CIOs are re-evaluating their 2009 budgets”. According to a chief executive at SAP “customers decide to postpone their [IT] decisions”. A CEO at another technology company is sited in the article as saying “we sent the invoices, customers just didn’t send us the money.” This signifies that not only will new business for tech companies be slowed, but it will also be necessary for them to increase their bad debt expense estimates.
Senior director of the CIO Executive Board, Joel Whitaker, outlines numerous other areas where companies are cutting back. Some of these include renegotiating contracts with vendors, cutting spending on consultants, and reducing the amount of new hires. It is clear that not only are certain sectors and projects within companies being hit hard by the current economic situation, but also that no industry is immune from its affects.


Author: Ben Worthen
Section: Technology
Publication title: Wall Street Journal. (Eastern edition). New York, N.Y.: Oct 7, 2008. pg. B.8
http://proquest.umi.com.proxyau.wrlc.org/pqdweb?did=1568691781&Fmt=3&clientId=31806&RQT=309&VName=PQD

Re evaluation of risk models

The current credit crunch in the United States is becoming increasingly contentious. Fingers are being pointed in multiple directions. The problem involves ordinary citizens, commercial, investment and mortgage banks and the government. However, technology has reshaped the face of the corporate world in a positive way, but the misinterpretation and inefficiency of technology could be met with drastic consequences. The issuance of mortgage-backed securities (the foundation of this credit crisis), which was recklessly sold to the homebuyers, uses a credit assessment system to determine eligibility for these securities. While these securities were recklessly issued, the scoring assessment models were inadequate and as a result, have misled the banks by excluding a host of risk factors in the determination of the FICO score.
In the article titled “The reverse reengineering of risk”, Clark Abrahams explains a new credit scoring system used for evaluating credit risk - The Comprehensive Credit Assessment Framework (CCAF). The CCAF “uses advanced technology and a safe sound model to develop and validate scoring processes. It considers all primary credit factors and takes appropriate action relative to those assigned segments. It also monitors the implications of these actions in a comprehensive and efficient manner”. It does this and distinguishes itself from the old system in such a way that it considers secondary factors, such as good consumer behavior, which could include payment of utility bills. It also factors a borrowers capital. Borrowers with a lot of debt and a lot of capital will be placed in a different category as someone with a lot of debt and no capital. Next, cash basis customers who save will no longer have subtle terms compared to installment debt carriers. Bank balances and a history of deposited savings will now be built onto the risk model using the CCAF. In addition, the CCAF will now take action in each scoring segment that allows the lender to determine what loan product the borrower will be successful at paying off and what he or she could afford. Furthermore, it possesses a feedback mechanism that considers macro economic conditions in the society such as interest rates, unemployment rates, inflation and housing price escalation to determine who qualifies and under what condition. Finally, while the old system looks at the past, the CCAF looks at the future and determines the worst-case scenario when economic factors come into play. For example, if interest rates go up, the CCAF determines the lowest possible default a borrower can issue, considering the concomitant rise in inflation rate. This is a powerful tool for the risk management division of banks.
On the other hand, some may argue that this new system while building a lot of new segments and factors in its model could lead to unfair lending. This may be the case; however, it may be necessary in issuing complex and expensive securities, such as mortgage securities. This new system may be seen as non-profitable in the short run, but will allow stability in the long run. It will not just influence people on how to save and manage money, but will also influence banks to realize the necessary elements and conditions that allow for ability to buy a risky security. This new carefully developed credit model may not be the solution to prevent another crisis. Human factors also need strong attention. At the end of the day, the bankers themselves say whether a loan could be given or not, in which greed is a large component of their decision. Combining a sound judgment with a carefully structured credit risk model will prevent another sub prime mortgage crisis from happening and will also stress the importance of technology in the economy, especially in the banking industry.


http://www.americanbanker.com/btn_article.html?id=20080929C4VN8N2E&pagenum=1&numpages=3&showallpages=true

Could IT have prevented the Financial Meltdown?

As things for better or worse continue to unfold in the Financial Crisis, the feds and surviving financial institutions are working diligently to unravel the loans, MBSs, CDOs and other toxic investments that have come to surface over the past year. Which makes us wonder: Does the technology exist to do that? If it does, then wouldn’t this technology have been helpful in giving us some indicators that could have helped prevent the financial meltdown we are now seeing in world markets? As this article points out, things may not be that simple. The fact of the matter is that even with regulations such as SarbOx, there are currently very few regulations on the origination of loans and how they are broken up, resold and resold again.

Some Background

Though it may seem rudimentary, one of the fundamental factors leading to this crisis was debt discipline. The finance industry has an accepted principle that home seekers should provide a 20% down payment on their desired house and finance the additional 80%. When banks began taking the misstep of offering the customers 100-percent-plus variable mortgages without any security, they were abandoning that discipline which is a pillar of the credit system. However lending firms were not solely to blame here, the Financial institutions of this country, most of which have gone under or been bought out, took this ignorance of debt discipline to another level.

Though the buying and selling of pooled loans called Mortgage Backed Securities is nothing new, Fannie Mae was established in 1938 for this purpose, the complex financial assets that were being created by world financial institutions were of a kind which we have never seen before. Financial firms were cutting these loans into 5, 10 or in some cases 20 slices and reselling them to 5 or 10 different organizations, making it extremely difficult to track who was involved and who was taking on the risk. Again the slow movement away from debt discipline is evident.

In theory these financial institutions knew the risk they were taking on with each loan and had a way to gauge if they had enough liquidity to support then if they went south. But as indicated by this article, most firms geared their analytic scenarios to favor positive outcomes in order to justify keeping less money in reserves. Josh Greenbaum, principal at Enterprise Applications Consulting, is quoted in the article saying, "A large number of buyers of these kinds of instruments really didn't care about the value. They just wanted to flip it. A lot of people just didn't want to know."

Even in this oversimplified version of how the world landed in this financial crisis, the ignorance of debt discipline is everywhere. Don’t get me wrong, borrowing money is good. Highly leveraged firms have higher rates of return compared to those firms that chose a more conservation route. However it is expected of these financial institutions, which are trusted with so much of our economy’s money, that debt is taken on in a responsible manner. This means that every measure possible is taken to assess the risk of that debt and the possibility of default. This also means that these institutions should acquire debt that is for the long-term benefit of the company and that the it can be paid off if needed.

Back to the real Question

So now that we see where things went wrong, we come back to the question: Could we have used IT to prevent this financial meltdown? The answer is: Prevent the meltdown? No, but IT could have given us some bright red warning signs of what was to come. Had these financial service agencies drawn out a few matrices giving the ratios of their cash reserves vs. their debt, some telling answers would have be found. As stated in the article, this process generally goes slow and ends with numbers having to be manually entered into Excel.

There are however some other options, particularly Complex Event Processing (CEP) and Operational Business Information (BI). These systems can analyze massive amounts of transactions as the article explains, “100,000 messages per second with millisecond response time, triggering remedial actions by other systems. But they can also be slowed down and used by analysts as a decision support tool. Tools such as Aleri's Liquidity Management System already exist to help treasurers in global banks gauge their liquidity position in real time” So yes there is technology out there that could have helped our preparedness for crisis that was coming.

Where do we go from here? Better late than never!

One of the major concerns now, is that there is another bunch of mortgages that are coming up in 2010 and 2011. Though these mortgages are primarily not “sub-prime”, we cannot be sure how they will effect our financial institutions or the global economy. What should we be doing then? Companies now, having seen the devastation, should be using CEP and Operational BI to help predict how these mortgages will alter the global economic scene. They should be using their advanced IT capabilities to develop more complex and fine tuned models specifically for this cause.

As we move on from here, it is assured that the Government will impose an array of restrictions on the financial markets and institutions. There is no doubt that these will entail quite of bit of regulation designed to keep debt discipline in line. With a new set of rules to play the game by and some new technology to help us avoid repercussions from past mistakes, global market will being the long process of rebuilding the world economy.

"How IT could have prevented the financial meltdown." TMCNet.com 24 Sept. 2008. http://www.tmcnet.com/usubmit/2008/09/24/3669282.html

IT in Banking

Banking is considered one of the most important sectors of the financial community and the economy. Banks eases the disparities between surplus and deficit units through the transfer of money and credit. The emergence of information technology has revolutionized the industry in a positive manner.

Subsequently, the dependency on information technology has strengthened and made banking ‘IT sensitive’; information technology continues to foster the industry’s growth and innovation. Despite the current financial distress and the gloomy economic conditions, financial sectors continue to invest in information technology. According to an article posted on the American Banker, a highly respected source in the banking and financial services sector, International Business Machines Corp recently acquired servicing deals with Allied Irish Bank, Standard Bank Group Ltd of Johannesburg, and the Bank of London and the Middle East PLC.

Accordingly, the strengthening of information technology in the banking industry is a growing trend. Financial analysts predict that banks will spend a total of $170 billion on technology in 2008. In my opinion, the present value of the cost appears relatively high given the extensive losses in the financial sector and the current economic state. However, it illustrates that the industry is planning for future success. A well organized and highly innovative company possesses a greater competitive advantage and captures larger profits and more growth. Some of the current financial distress is a direct result of mismanagement and flawed internal structures; therefore, utilizing innovative tools to internally restructure will improve efficiency and lead to success. For example, consolidating data and making it more easily accessible cuts cost and improves productivity. Ultimately, society is more heavily relying on information technology to modernize the business world and improve market efficiency.

The banking industry’s welcoming attitude toward information technology is a change from earlier decades. Previous research suggested that IT was perceived to have a negligible impact on banking. According to “Information Technology and Productivity Changes in the Banking Industry,” a study published in the Economic Note, a prominent source that discusses the latest developments in the banking, finance, and economics, the authors hypothesize and mathematically prove that productivity and profits rose and costs lowered once the industry fully acclimated itself with technology. The authors validly claim that previous studies failed to factor in industry related variables and the need for an adjustment period when they hypothesized that productivity remains unchanged after the inauguration of new technology.

The increasing trend toward IT dependency makes it difficult to imagine the business world existing prior to the creation of information technology. Subsequently, personal biases made it difficult to analytically evaluate the study. In my opinion, growing up during the IT’s coming of age makes me non-partial towards the subject matter; consequently, I was closed minded toward alternative hypothesis outcomes and unable to challenge the authors’ opinion.

However, I did have some apprehensions regarding the structure of the study. I was concerned about the subjectivity in the design; I thought is almost impossible to objectively assign numeric figures to factors such as efficiency. Slight miscalculations or errors in estimates can have serious consequences on the conclusion. In addition, I thought the conclusion was based on a limited sample. Although the authors included theoretical research from other studies, the empirical data was limited to Italian Banks. Despite factoring in economic variables, focusing on only one country’s banking industry narrows the scope and the results.

Although it is impractical to expect any one study to consider every effectual variable, the analysis appears to accurately factor in a number of the important ones, such as deregulation and macroeconomic shock. Ultimately, the authors’ conclusion was exactly what I predicted. IT tremendously impacted the banking industry’s productivity, profits, and costs. The authors accurately point out that previous studies failed to grant banks an adjustment period to acclimate itself with new technology. The implementation of IT involves drastic reorganization and proper training in order to benefit. In addition, the quality of output that resulted from the shift changed so tremendously that it was originally difficult to accurately measure. Although, the study is well developed and researched, I would go as far as to say that it is difficult to accurately place a number or percentage on the effects of IT; therefore, I believe there is possibility that the article undervalues the full impact.



Bills, Steve. "IBM Sees Three Foreign Deals as Promising Sign. " American Banker [New York, N.Y.] 17 Jan. 2008,13. Banking Information Source. ProQuest. 7 Oct. 2008



Casolaro, Luca. "Information Technology and Productivity Changes in the Banking Industry." Economic Notes 36:125 May 2007 43-76. 7 Oct 2008 .

In light of recent bank failures, Electronic Platform for CDS is proposed

In light of recent bank failures, Electronic Platform for CDS is proposed

By: Ryan Van Parys

At the urging of the Federal Reserve and SEC, a hedge fund in Citadel and a clearinghouse in CME(Chicago Mercantile Exchange) group have announced a plan for a joint venture which would introduce the first electronic exchange for Credit-Default Swaps which would bring standardization and improved liquidity to a market which is in part to blame for the current financial crisis. The market currently covers $55 trillion in assets and has been in part responsible for the demise of financial giants such as AIG, Bear Stearns, and Lehman Brothers.

Credit-Default Swaps are derivative instruments which act as essentially insurance for defaults on issued bonds, mortgages, and other leveraged securities. If, for example, Bank of America were to default on their corporate bonds tomorrow, bond holders would not get paid (outside of collateral), but CDS holders theoretically would get paid some sort of premium. Likewise, if Bank of America does not default, then bondholders get paid and the seller of CDS securities also gets paid (think insurance company). However, CDS markets in current form are unregulated over-the-counter markets (OTC’s) where it is uncertain whether or not the seller of a CDS is backed by any collateral, making the investments highly speculative in nature. In addition to the complexities involving the actual issuing, the pricing on CDS securities is often even more cumbersome. Currently, there are very few standardized pricing agencies for CDS, since the securities are traded over the counter; and since the price includes risk from default from the company, contractual obligations AND default from the seller.

In addition to the bad debt that CDS swaps have presented, they have also become particularly harmful to both the bond and equity markets. When institutional investors wish to understand the likelihood of default by a company, they often look to the CDS markets to see what interest rates CDS policies are currently demanding. In the equity markets this often causes downward pressure on stocks(especially in the current market), and in the corporate debt market it forces corporations to offer higher interest rates when issuing debt.

The article discusses how CME group and Citadel plan on launching an electronic exchange in early November where investors can trade anonymously with the advantage of standardized contracts, regulated pricing, and a clearinghouse which will guarantee payment on CDS securities. The move from an archaic over-the-counter system with many problems to an official exchange which utilizes regulation through technology will hopefully bring more transparency and liquidity to a market which desperately needs it. In order to encourage activity, the exchange is offering up to 30% equity and the ability to become market makers for current large institutional investors already entrenched in the CDS business. The new exchange also hopes to partner with other clearinghouse and pricing groups in order to bring more liquidity and standardization to the market.

While the market seems like the right thing to do for the economy, it is unclear as to whether investors of CDS securities will actually participate. Since the market is currently unregulated, the OTC market makes it easier for large investors to manipulate spreads and often lead to higher returns. However, Citadel has a very strong reputation in the CDS market and could very well draw many of the big names to the exchange. Regardless, the Fed has set up a meeting with CME, Citadel, and other companies considering starting their own CDS exchanges to discuss progress within the upcoming weeks.

The exchange introduced by CME and Citadel utilizes information technology in a number of ways. First, one of the main issues with the current CDS market is its lack of transparency and inability to collect off of a bad debt. With a new, highly automated electronic exchange being implemented, it will make it much easier for buyers and sellers to collect on their debt which, in some cases, has been outstanding for years. Additionally, the technological platform will make it easier for liquid assets to flow as spreads and contracts will be more standardized and research will be easier to come by. Finally, the electronic exchange will help liquidity in the market by providing open access to more buyers and sellers through the exchange. This will bring more competition to a market which is currently very exclusive.

While I do believe an exchange for the CDS market is a step in the right direction, it is unclear to me as to why this market is not currently regulated by the SEC or even Congress. From the articles I have read, it seems that they are not regulated because they are simply so misunderstood. I find that inevitably hard to believe as there is currently over 55 trillion dollars in debt outstanding with a high percentage of that number in absence of collateral. I think the federal reserve would like to do something about cleaning up the market, and the implementation of an exchange seems to be the first step.

Main Article -- http://online.wsj.com/article/SB122334553812310351.html?mod=googlenews_wsj

http://www.247wallst.com/2008/10/what-a-cds-exch.html

http://www.forbes.com/markets/2008/10/07/cme-citadel-update-markets-equity-cx_cg_1007markets32.html

Syndicated lending declines as banks tighten credit facilities

The article talks about how the lending of credit facilities has decreased substantially in the United States as well as in Europe, the Middle East, and Africa (EMEA). While the slowdown has been substantially less in EMEA than in the United States it is still very prominent. Reuters Loan Pricing Corporation has said that longer maturities are the lowest they have been in 19 years and which shows that no one wants to loan for extended periods of time. The volume of three year loans has risen from 2007 to 2008 by almost four times showing that some of the loans are being shortened and not completely eliminated.

The article discusses the shorter loans, higher interest rates, and decreased volume in terms of numbers, but does not deal with the overall effect this will have on the companies. The first thought that comes to mind is that the holiday season is going to be rough on families because they might not have enough money for the usual travel and purchases that go on. This will return to hurt the stores because they rely on their holiday sales to pull them through. When holiday season comes into full swing it will be interesting to see the effects on the market. Current loans that have been taken out might not be able to be paid back thus making the credit situation worse; more companies may go bankrupt after the holiday season is over.

From the data it appears as though the tightening of credit lines is just starting to hit Europe and will most likely follow the same path that credit has in the United States. This will cause increasing problems for global corporations as their loans in other countries also get cut off. It will also hurt our economy as business overseas fall under because they won't be able to provide the United States with the imports that it usually takes in. This could be both good and bad for the United States because while it will decrease our reliance on other countries, it will probably also cause a rise in prices. Additionally, it might cause a slide back from the globalization that we have seen over the past few years during which economies were striving. Less companies will expand overseas in the coming years because they don't have the funds to do so which will, for the time being, stop the sending of jobs overseas. Globalization will have to be put on hold until companies are able to pay off their debts and banks increase their lending again.

What's Ahead In Business Credit Technology

What's Ahead In Business Credit Technology?
Tom Diana. Business Credit. New York: Oct 2006. Vol. 108, Iss. 9; pg. 32, 2 pgs

Technology has played marvelous innovations in the financial industry for the last 20 years. Today, business professionals have a wide range of financial tools for credit scoring, collections and obtaining credit information from potential customers. New and improved internet and software have revolutionized the financial industry. A major change that we are experience in the 21st century is the process of automation in the credit firms. This is primarily due to the advancement in technology. Powerful software has been developed to facilitate various functions in the financial industry. One of the most unique features of this improvement is the ability to integrate technology into credit scoring. Credit scoring represents the creditworthiness of a person calculated based on the information maintained by the major credit bureaus such as Equifax, Experian, TransUnion and Innovis. These independent credit bureaus electronically maintain a history of consumer’s payment record, control of debt, credit inquiries made by other lending institutions, outstanding amount of debt the person is obligated pay and the time-span of each account the consumer has. As a result, lending institutions now have the capability to electronically report and access a person’s credit history retained by these credit bureaus within few minutes and decide whether they can extend a line of credit to that person within very short time.

One of the most unique features of development of new and improved credit management software is their ability for firms to use them to gain a proprietary advantage over their rivals. Financial industry is seeking a cost advantage by managing their IT resources more effectively. This extends from developing new software or improving their current software, outsourcing or even using remotely-hosting their software. This article explains the benefits of remotely-hosted software in the credit industry, rather than software installed on a company's own servers. According to this article, Michael Banasiak, President of Predictive Metrics, believes in cost advantages of outsourcing the hosting and maintenance of software to companies that specialize in that service. He says "It becomes more efficient. We outsource tasks in which we are not experts; it provides an economic edge."

As IT enables these changes, it creates a competitive credit market and the competitiveness ultimately benefits the consumer by lowering prices. Today, consumers have the capability to get unlimited access to his or her credit repot and monitor them real-time just by paying fraction of the money they would have to pay few years ago. Technology has created a gateway for other firms to look into new forms of business with the credit industry. Business like real-time credit monitoring, scoring and identity theft protection didn’t exist few years. It is because of technology that they are becoming more and more profitable today.

What's Ahead in Business Credit Technology?

This article does not deal with credit in the banking sense, but instead refers to business credit, which usually involves one business giving credit to another business that seeks to purchase products or services from the former. Similar to banks, many businesses have credit departments that use specific technology for credit scoring, collections and assessing risks in issuing credit. What this article focuses on are the foreseeable advances and innovations in technology for the business credit sector.
The author starts off with the usual benefits that can be gained from applying technology – cost-savings, speed, efficiency and interoperability between systems and departments. Considering the publish date of the article (October 2006), all of these benefits appear today as both taken for granted and applicable to any business department, not just the credit one. However, in my opinion, the article provides one exceptional insight into the future workings of credit departments and perhaps the credit industry as a whole – the utilization of Web 2.0 capabilities in issuing credit.
There is no specific mention of Web 2.0 (probably because the name was not used very broadly in 2006), but two of the interviewed executives – Joshua Burnett of 9ci, Inc. and Michael Banasiak of Predictive Metrics, discuss the enormous potential for credit departments in online collaboration and data and information sharing between users in businesses – two of the main characteristics of Web 2.0. The article even goes as far as saying that social networking groups like MySpace and LinkedIn would eventually evolve within the credit industry (CreditBook.com or CreditBlogSpot.com anyone?).
It is interesting to try and estimate some of the benefits from such interconnected groups. Among the obvious benefits is that businesses will be able to share information on credit-worthy customers and at the same time warn each other of risky ones – a sort of eBay-rating-like system. Additionally, the consolidation of information among many small businesses will begin to rival that of major banks and institutions, thus empowering such credit networks to rely less on the expensive proprietary information of others and to protect themselves from the inaccuracies and anachronisms that are sometimes inherent in external data sources.
According to the article, the impact of these collaborative business networks would be felt most noticeably at the small business level. Nevertheless, given the current financial situation in the country, one could wonder whether the existence of enough shared data between banks and lenders could have mitigated the effects of the subprime crisis by providing more comprehensive risk assessment capabilities.
And on a final note, there is always the threat of having too much information in one place, even if it is accumulated by many sharing entities. Many people would probably dislike the idea of having their future car dealer know about that one time their credit card was rejected at the restaurant, just as businesses would dislike the idea of not being able to start off with a “clean slate” when they go to a new lender. But then again, all that is probably already stored in a database somewhere, just as this innocent little blog post will be.

Main Article: What's Ahead in Business Credit Technology
Author: Diana, Tom
Publication Title: Business Credit. New York: Oct 2006. Vol. 108, Iss. 9; pg. 32, 2 pgs
ISSN: 08970181
ProQuest document ID: 1150835061
Document URL: http://proquest.umi.com.proxyau.wrlc.org/pqdweb?did=1150835061&sid=1&Fmt=4&clientId=31806&RQT=309&VName=PQD
Database: ProQuest, Banking Information Source

The downturn in IT company profitability

Not too long ago, information technology companies were assuring their investors that they would not be as affected by current economic conditions as others have been, citing large cash reserves, relatively infrequent borrowing and a strong, consistent customer base. Businesses rely on IT companies for innovative hardware and software packages that drive productivity, more than making up for the initial investment. Take a look at this quote from this quote in the Wall Street Journal on July 10th:

In a survey conducted last month in cooperation with the Securities Industry and Financial Markets Association, IBM found that 21% of those questioned were planning to increase IT spending by up to 10% this year, and 18% saw increases of more than 10%...The responses cover computer, software and services buying. Managers were asked to exclude staffing costs.

The article goes on to cite market researchers seeing a reduction in tech spending, but not a contraction (down to 4% from 7% previously). Now, another WSJ article posted on October 7th states that the trouble facing these IT companies may be more serious than what was accounted for; SAP stated that their third-quarter revenue would fall short of what they initially expected and had told investors.

The problem is coming from their revenue source: their customers. The financial giants on Wall Street--who were, at one point, some of their best customers--are imploding and strongly affecting the rest of the economy. Businesses large and small are no longer able to the finance integration of new hardware and software. The CIOs of large companies are facing budget cuts while small companies can't get a loan to make their business more competitive through tech solutions that companies like SAP offer.

Each job within the banking and finance industry supported between two and three other jobs, as said by Ken Goldstein, economist at the Conference Board in this WSJ article. These are the same industries that are suffering right now as the businesses within either collapse or swallow each other in desperation. Jim Jarman, President and Chief Operating Officer of computer-supply company E-Mediaplus has cited hundreds of thousands of dollars in losses since this began. Integra Software Systems has seen several of its customers disappear; they provided lending software solutions for the banking industry. The future is still uncertain for IT companies, but particularly troublesome for those that specialize in assisting the financial and banking institutions of America.

Reverse Reengineering of Risk

Reverse Reengineering of Risk
Bank Technology News Wednesday, October 1, 2008
By Clark Abrahams
http://www.americanbanker.com/printthis.html?id=20080929C4VN8N2E&btn=true

The article calls for use of comprehensive credit assessment framework (CCAF). This uses “advanced computing technology and a sound, safe model development and validation process. The CCAF approach naturally affords a sustainable and sensible segmentation based on all primary credit factors; providing ongoing monitoring of the impact of those actions in a comprehensive and efficient manner”. This increases qualification criteria, new actions for each segments and model possible scenarios.

Credit-risk scoring came into use in the banking industry in the 1970s which ended the judgmental and biased lending decisions that were used. The recent economic crisis exposed that the science of risk scoring is somewhat flawed analytics that made assumptions, like incomes don't matter and those who pay in cash are riskier bets. The current system has two fundamental problems such as weakened underwriting standards and degraded loan quality. The current credit scoring method has done a subpar job of assessing risk in dealing with the current subprime mortgage market. Most underwriting systems did not capture all of the risk factors that the current incarnation of the market faces.

This can be seen in particular when the conventional risk models were applied to non-conventional loan products. The lenders who depend on these credit-scoring systems are using the credit risk models inaccurately and incompletely for their daily business use. Secondly, there is a blind spot in underwriting practices that are used currently. There is too much dependence on quantitative models and automated underwriting systems employed today. In sort, the technology that is in place today is too over abundantly used and relied on to make judgment on risks when it comes to the lending of credit.

With the current use of technology and the current economic crisis there is a need for revamping the credit scoring system and how much faith is placed in technology. The key point is that as our technological capability and our economic means expand, we must update pass used measures. The credit scouring system has not changed as we have. The current system has not failed us, we have failed the system. We have failed to continually improve and adapt the system to ensure proper results.

With the creation of new forms of investments new measures must be put into place to change our old fundamentals of risk management in the credit community. More faith must be placed in our own physical means of business and not rely on old outdated methods. We must not totally rely on one method to determine credit risks, especially if the current means that we employ do not take into account the totally variables that exist in the market and person to person.

The technology and models that we employ is a great tool that we have ability to use. But we must not place absolute belief in them. We must ensure that as the investment opportunities change, we must change the way the tools are used. Hopefully, we can learn from the mistakes that have been made to ensure such crisis do not happen again.

IT spending amidst the Financial Crisis

Many banks and brokerages have been forced to lay off many workers due to the financial crisis, but according to the IBMC (International Business Machine Corp) 200 CIO’s have said they will increase spending in information technology. Along these lines IBM has said that in their studies 21% of companies plan on increasing spending for information technology by 10% while 18% of companies polled plan on increasing spending more than that. For the rest of the companies 20% said they will cut back on IT while the rest said they will keep it the same. These stats were for the 2008 year, for 2009 it is predicted that 41% of all companies information technology budgets will increase, 13% decrease, and the rest being unsure or keeping it the same. The poll was on the budget that they spend for computers, software, and IT services. A study by Goldman Sachs said that the largest 30% of firms do plan on cutting back IT expense.

According to an article this is due to many companies outside of Wall Street having remarkably strong balance sheets so they are able to increase or flat line IT spending. This article talks about how an economic recession is a time to make investments in IT.

Having small to medium companies not in the top 30% largest companies that have solid balance sheets amidst this crisis have a huge advantage when this recession is over. The further ahead of the competition you become in the technology apartment the better off you are. Since the highest IT priority for big financial firms is systems for improving risk management having a company it is not necessarily a great business decision to be cutting back given the state of Wall Street at this point. Another huge part of their budget was systems to improve the analysis of customers and profitability. By cutting back in these areas they are not able to get as good of a picture of each customer and how to expand their business as those companies that may be smaller that have increased or kept IT spending to further themselves and compete more.

http://proquest.umi.com.proxyau.wrlc.org/pqdweb?index=0&did=1507967151&SrchMode=1&sid=1&Fmt=3&VInst=PROD&VType=PQD&RQT=309&VName=PQD&TS=1223413527&clientId=31806”

“http://web.ebscohost.com.proxyau.wrlc.org/ehost/pdf?vid=10&hid=114&sid=d8151851-4cd2-43b3-babe-cdafc24340c6%40sessionmgr107

Government Backed Securities Only Helping the Well to Do

If you've been listening to the political economic talk in the last couple of weeks then you know that financial experts are telling the public not to worry about the possibility bank-runs. A bank run, in the old days of the depression, was cascading effect where in which many customers withdrew money in fear of the banks failure.

Since then the federal government has taken measures to insure bank customers up to 100,00 dollars so that people can feel confident in their financial institutions. Without that capital banks can't lend to businesses and take out mortgages.

An article written in The Disciplined Investor has risen a few good points about federally backed banks and banks that aren't completely insured. The jist of the problem is basically in the fact that individuals will spread out their assets to cover the amount of money the federal government will repay in the event of a catastrophe.

Recently the government has increased the amount of insured dollars to 250,000 dollars. It should be noted that this article was written about a month ago and the increase was only done a few weeks ago. Still the problem remains. People will still attempt to game the system and millionaires will spread out their assets to insure financial security, especially in these times.

Not every single bank is insured by the federal government. One of the biggest problems that poor people have is getting access to credit and homeless people rarely have bank accounts. The banking industry has used sub prime loans to bring in those lower paying people into the market.

My question is this: now that the financial market is in turmoil does the new 250,000 dollar insurance and 700 billion dollar bailout only ensure financial security for the well to do?

Mobile Banking: Success only with Security

As technology offers ways of doing virtually everything from your computer whether it be order groceries, buy furniture, and trade stocks its hard to think, what's next? Well, there's an answer. Doing everything from your phone. With the growing popularity of iPhones, Blackberrys, and other PDAs the newest and coolest technological abilities seem to be for the phone rather than for the computer. One of these technologies which is expected to "explode" in the coming years is mobile banking. According to the MarketWatch article, "Mobile Banking Poses Fraud and Money Laundering Threats for Financial Institutions" by 2012 the mobile banking channel is expected to over 42 million customers from a meager 1.1 million customers in 2007. Currently available in the US, South Korea, Hong Kong, and Brazil, mobile banking offers customers a range of services from making and sending payments to trading stocks. As financial institutions offer customers such innovative services the article highlights the importance of information system security and potential threats to such innovative technologies.

As mobile banking technologies are still in their beginning stages, there have not yet been major threats, scams, or security problems. However, just as with any new technology, as demand and use increase so does the potential for misuse and hackers. Before customers sign up and utilize technologies such as mobile banking, they must be confident that their transactions, identities and alike are secure. From the financial institution’s perspective, not only must they ensure that customers have enough confidence and trust to use the technology but they must also ensure that the services do not create loopholes for criminals to utilize for money laundering or fraud.

A common theme surrounding innovative technologies which seem to grasp the market and become the methods in which we conduct our daily lives is security. Whether it be the security of the servers that host the world's largest stock exchange, or the security of the Internet when we process our credit card for a purchase, it is vital to the success of technology.

Mobile banking is no different. In order for it to "explode" the proper security constraints and protection must be in place to ensure that the technology only makes business more efficient rather than more penetrable. "But with this new channel, banks must also shore up their defenses with appropriate technological and program controls to make sure they can offer these services effectively and safely."

When combining information technology with financial services it is imperative that a strong balance of utility and security is achieved in order for products and services to be reliable and successful.

"Mobile Banking Poses Fraud and Money Laundering Threats for Financial Institutions"
http://www.marketwatch.com/news/story/mobile-banking-poses-fraud-money/story.aspx?guid={B1148F77-FCF1-461F-AE47-944985DB0E85}&dist=hppr

The Land of Children that Never Grow Up

With current bailout plans being set into motion, it served as a reminder over the past few weeks what type of credit crunch the United States is in. George Cooper, a strategist at JPMorgan, dilutes the problem by saying that central banks are subscribing to an economic philosophy in an expanding economy and another when the economy is constricting. When things are going well, the central banks leave the market alone, but when the slightest predicament arises central bankers respond by cutting the interest rate to stimulate their economies, preventing asset prices from lowering.

This asymmetric monetary approach asserts a belief that in the efficient-market theory, prices will reflect all available information. Stating that prices will always be right and there are no bubbles, leaves us to think that central banks have no reason to intervene in these circumstances. Indeed, if the markets actually worked this efficient as some believe, why would economies need to have central banks catch them when they fall? Mr. Cooper’s observations about the depressed savings rate leaving the economy riskily positioned forced to deal with the adverse effects, is a no brainer. The United States has been careless in encouraging consumers to support the economy, and all the meddling to keep the banking sector together myopically unaffected by the consequences is now rising havoc. As for the rest of us, we have to put up with incompetent management that ventures on the belief of rewarding risky behaviors and evading the cautious financial management approach. If we remove an incentive to steal and not allow senior executives to bail out with their golden parachutes, problems that Lehman had will not happen.
Clearly, what people seem to forget is that this problem did not arrive yesterday.

Truth be told, it has been like this since 1913 when the FRB came into play. With social programming taking off and Nixon abandoning Bretton Woods, the gold standard gave politicians free range printing all the fiat money they wanted. Therefore, it is catching up to us and we have to pay for our reckless actions from the past 100 years all at once, attempting to make our economy golden once again. So, from a government regulated by capitalistic individualism, why is everyone acting on all of these impulses with a complete disregard of responsibility for their actions?

I believe the most straightforward way to fix this problem is for the Federal Reserve to raise interest rates to fight inflation by 50bp per FOMC. This will lead to a sharp extraction in credit and take money out of the economy. This should command to an increase in deposits in the banking systems, which would lead to an internally developed stability and theoretically lead to a rise in the American Dollar. This would allow all imports to be priced cheaper, leading to more deposits, as the falling price of imports would free up salaries and let people put them towards savings. This would allow the deposit transactional banks to imbue investor confidence by having more stability and a greater monetary value in the American Banking system.

Buttonwood. "Credit and Blame." Economist.com. 11 Sept. 2008. 30 Sept. 2008 http://www.economist.com/finance/displaystory.cfm?story_id=12209655.

Buffett's Financial Bet

The $700 billion government bailout had been finally passed and then the President Bush was too impatient to wait to let it went into effect. When Bush signed this most grand bailout act ever in American history, he said, we should take this adventurous act, in order the crisis happened in the Wall street would spread into the whole society and country.

After the discussion of whether or not to save the Wall Street, the focus of us turning to whether this largest and greatest bailout could retrieval the Financial Crisis, resume the confident of the investor and the ultimate result of this bailout should prevent the financial crisis turn into the economy crisis of whole country. However, no matter the market, investor and the analyst could not take much hope about the bailout. After the transitory went up of the stock market that day, three indexes has rounded to a new turn of went down.

Though the passage of the bailout is most significant as a statement of purpose that Washington is not going to let the financial system melts down, as far as I am concerned, this bailout could hardly change the expectation of the market and therefore, hardly serve the function as it should be. In essence, the bailout plan is nothing but peels off the Non-performing Financial Assets of the Financial Institution, stops the loss of the bank, resumes the liquidity of the credit market and when the liquidity is enough, the confident of market would be restored. However, the key problems of this issue is no one knows that how severity the crisis is, which direction the market would lead to and when the crisis would over. These three questions are far beyond the cognizance of common people, and no one could make an exact forecast of the market in the future. Therefore, obviously, the market is lack of confidence to the issue that whether the $700 billion bailout could plug up the “black hole” of the crisis. Based on the argument above, I think that the bailout could just alleviate the destruction of crisis, but has no use in stopping the financial crisis fundamentally. Moreover, this financial crisis has already impacted on the real economy which is the most important target of the American government to prevent. Now, lacking of the liquidity has already influence the outside of the financial system, first at first is the small- and medium-sized enterprises of American.

The economy output of the small- and medium-sized enterprises contains more than half of the GDP of the United State. However, due to the difficulty of borrowing the money from the financial institution, they faced difficult of financing. According to the data of the American government, the opportunity of employment excluding agriculture has been decreasing in the last eight month and the unemployment rate has been increased to 6.1%. Therefore, the responsibility of the so-called bailout is to build a firewall between the real economy and the virtual economy in order to prevent the crisis of virtual economy the spread onto the real economy. However, in my view, the stableness of the firewall could hardly protect the real economy from being disturbed.

Anyway, the bailout has been passed by the congress and then we’re wondering the how Hank Paulson would carry the bailout into execution. From the angle of the economy of globalizing, I hope the economy here could get out from under. But I think this bailout could only address symptoms but not root causes.

Posted by Feng Guo, the article comes from http://online.wsj.com/article/SB122307417911703781.html

Blockages in the money markets

In this article, author thinks that the recent Money Market is just like a Blocked pipes. Why? Because the banks are hoarding cashes. How did such things happen? Let’s have a look at the overview of the whole process. On Oct 1st, the dollars’ borrowing costs of banks reached 4.15% for three-month money, more than two percentage points above the fed funds target rate. It has kept growing for almost 1 year, especially went up during last month. Then the cycle began.
Higher borrowing costs for banks—higher borrowing costs for consumer, including both residents and companies— companies try to borrow money in other ways other than loans from banks—they would like to issuing commercial papers—this way performed not very well. First, buyers are requiring higher interests and shorter terms. Second, there are few buyers who are still confident in the economic—companies call on their back-up loans promised by banks when the economic situation is good—banks have to keep their cash in store to keep their promise and also in case depositors make large withdrawals—higher borrowing costs for banks...

In my mind, the cycle above only represents what happened in money markets. Actually, when bank is hoarding their cash, another cycle more close to our daily life emerges. Bank is hoarding their cash—residents find it cost more to get credit or loans or even unavailable. Because the bank is tightening their lending standards—consumption of goods such as houses and investment in stocks and securities market decline—companies suffer from lack of revenues and investment, which are necessary for them to continue operating—companies fire workers in order to cut costs—increase of unemployment rate makes people’s forecasts of economics worse—people all go to banks to get their deposits out in case of banks’ bankrupt—Bank have to hoard their cash...

Although the two cycles’ juncture is Banks’ holding cash, I think that is only one result not the reason for the crisis.

In the money markets, there are two terminals—Banks & Money Funds and Consumers (personal investors, companies, etc). In terms of consumers, to make the situation recover, it is essential for them to become confident again in the money markets and whole economics. As for the 700 million bailout plan, the federal still needs time the implement the plan. Before that, the most important thing that the government wants to show to the residents is their determination in getting the economics back, through which they are trying best to boost consumers’ confidence. As for banks and financial institutions, they should take their business more serious to be responsible to whether depositors or investors. As for federal government, which plays a role of regulatory power in market, they should make more efforts not only to help restoring the mutual trust between institutions and consumers, but also to regular the market in case of the same situation in the future.



The article is available at http://www.economist.com/displaystory.cfm?story_id=12342237