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.