OECD demands stronger EU regulations

European governments should consider accelerating the phase-in of Basel III capital accords and be prepared for a new round of bank recapitalisations, the OECD has warned.

In a regional economic study published on Monday, the Paris-based international organisation claimed that more needed to be done to protect the EU's banking system from future shocks and to tighten the European Growth and Stability Pact.

It also warned that financial support to stricken countries such as Greece should be withdrawn if restructuring conditions are not met.

"Few countries have developed a comprehensive approach to deal with weaknesses in the banking system," the report said. "Further recapitalisation of banks could be necessary.

"Stronger regulations are needed to improve financial stability. Effective microprudential regulation is the first line of defence.

"This should be upgraded by implementing the Basel III capital accord... and a range of related measures. Some consideration should be given to an accelerated phasing-in."

Presented by OECD Deputy-Secretary General and chief economist Pier Carlo Padoan in Brussels today, the study calls for EU stress tests to become "a regular exercise" and for an overhaul of the European Growth and Stability Pact to include significant penalties for misbehaving countries.

"Sanctions should range from intrusive surveillance and warnings by the Council to financial sanctions. Monetary penalties should include the requirement that funds be posted to an interest bearing account until corrective policies have been implemented."

The OECD, which has 33 member governments, said it supported a "credible mechanism" for fiscal crisis management, but warned that financial support for countries facing liquidity crises, such as Greece, should be withdrawn if strict conditions attached are not fulfilled.

"The framework should be prepared to deal with this eventuality," it said. "Sovereign risk should be fully reflected in financial regulations."

Where good ideas come from

Ever wondered how innovation works? We live in a world where new processes and ideas abound. But how do they get started? What triggers these ideas?

A contact recommended this video by Steven Johnson on breakthrough creativity and innovation. He suggested that I take a colder look. He was absolutely right. It’s great! It’s amazing! It explains where good ideas come from and why hunches need time to incubate and turn into breakthroughs. It’s in English with Spanish subtitles…. And everyone should watch.

Mobile Banking and Microfinance in Malawi and Tanzania

Mobile banking including mobile phone banking continues to be one of the great success stories in poverty alleviation for geographically remote microfinance clients in sub-Saharan Africa.

The majority of Tanzania’s 41 million inhabitants live on less than US$2 a day, and only 12% have a formal bank account. But half own a mobile phone, through which they can save money and handle financial transactions without a bank account.

These phones are relatively inexpensive to purchase. One astounding fact is that they are the first technology in history to have more low-income users than wealthy ones, according to Abbie Laugtug, a policy advocate for the nonprofit organization CARE.

Dennis Ripley, SVP of programs at “Opportunity Malawi” says that mobile payments make it possible for individuals to save as little as $1 or $2 at a time, amounts too small for deposits to formal banks, given the 30 cent cost of a deposit. It can also be the first step into the formal financial system for low-income Africans. “We’re working with mobile phone operators to connect their payment customers to Opportunity Bank, operated out of trucks and storage containers across 21 countries in Africa, at a cost of 3 or 4 cents per transaction.”


Malawian clients access banking services
at  a mobile banking vehicle.


“We equip vans and trucks as banks on wheels to go into the last little communities throughout Malawi and park there and do banking once or twice a week,” Ripley says. “Most of our clients have never been able to go into a bank because the minimum deposits are so high.”

At Opportunity Malawi, we expect to expand from our current 305,000 savings accounts to 1 million within three years, thereby banking with about 7% of the country’s population. Opportunity can reach far more people than a traditional bank and help them avoid the long $1 bus ride into the town, Ripley says.

Ripley calls systems for paying and storing money on mobile phones “revolutionary.” He reports, “The ability to take your cell phone and transfer money or make a payment, you have changed [Africans’] lives fairly dramatically in terms of their time and their cost.”

Remittances update

Officially recorded remittance flows to developing countries are estimated to increase by 6 percent to $325 billion in 2010. This marks a healthy recovery from a 5.5 percent decline registered in 2009. Remittance flows are expected to increase by 6.2 percent in 2011 and 8.1 percent in 2012, to reach $374 billion by 2012.

It should be noted that the World Bank’s definition of developing countries has changed. As an example Poland, which is estimated to have received $9.1 billion in 2010, is no longer classified as a developing country.

This outlook for remittance flows, however, is subject to the risks of a fragile global economic recovery, volatile currency and commodity price movements, and rising anti-immigration sentiment in many destination countries.

From a medium-term view, three major trends are apparent:

• a high level of unemployment in the migrant-receiving countries has prompted restrictions on new immigration; 
• the application of mobile phone technology for domestic remittances has failed to spread to cross-border remittances; and 
• developing countries are becoming more aware of the potential for leveraging remittances and diaspora wealth for raising development finance.

Foreign-Exchange banks secretly plan new trading system

The way currencies are traded could be heading for a major shakeup as the most powerful banks in the business conduct secret plans to launch a new banks-only dealing system, several people familiar with the situation have said.

Almost all of the 10 biggest banks in the industry are thought to be behind the initiative, but non-disclosure agreements currently prevent them from discussing the matter publicly.

The plans reflect dissatisfaction among some banks about Icap PLC-owned EBS--currently the No. 1 currency dealing system for banks, with a daily average of over $160 billion in flows in November.

Some of the established banks in the industry feel that they have been put at a disadvantage in trading on this key system since fast-acting hedge funds and other non-bank dealing firms were first allowed to use it in 2005.

The plans could easily fall flat; establishing new platforms between competing banks is notoriously tough, and taking on EBS for some flows is an ambitious aim. In addition, Icap still has a chance of working with the banks to create a new system, some people familiar with the situation said. But if that falls through, the banks are set to execute some trades elsewhere.

"It's a case of telling EBS to come up with something for us, or alternatives will happen," said one key banker behind the project, which has a working title of Pure FX.

In an emailed statement responding to a query from Dow Jones Newswires, Icap said its EBS platform is the core source of liquidity in the professional global spot foreign-exchange market.

"We are committed to continuously engaging with our large and diverse customer base to ensure understanding of their requirements and to develop solutions that satisfy their needs," the brokerage said.

Sources familiar with the talks said none of the banks involved is understood to be considering leaving EBS, whose prices are viewed as the industry benchmark, particularly in key currencies like the euro, dollar, and yen.

"EBS is a key partner for us," said a senior foreign-exchange banker at one of the firms involved in the new venture. But if the plans go ahead in their current form, which is "very likely" according to one of the key bankers behind the initiative, EBS stands to lose 10% to 15% of its flows.

In pursuing their plans, the big banks whose dealing desks have traditionally been the middlemen in the giant global foreign exchange market have come full circle on their strategy for maintaining control of it. EBS itself was launched in 1990 by a consortium of banks seeking to challenge Reuters' dominance of electronic foreign exchange platforms.

The current issue comes down to the activities of some non-bank market-makers on EBS, which effectively compete with the banks for volumes in the $1.5 trillion-a-day spot foreign-exchange market.

These firms tend to be nimble and able to pump out and snap up prices at such extreme speed that they can nibble away at banks' large orders and make it difficult for the banks to complete large trades at the price they want.

EBS has long worked hard to balance the needs of the banks that were once its owners, and these newcomers, but some bankers are still unhappy.

"We want to create a level playing field where banks can trade with each other," said one of the bankers behind the rival project.

But others are skeptical of the banks' motives.

John Netto, president of New York-based proprietary trading firm M3 Capital LLC, said the proposal sounded like "a country club" where banks could trade away from upstart electronic firms that have put pressure on profit margins in foreign exchange.

"So that's how you handle competition?" said Netto, who added the end result of the banks' venture would be a more fragmented market for all investors.

Some market insiders believe that banks need to learn to live with the new reality of non-bank market-makers, rather than trying to revert to the time when they effectively controlled the market.

 "These non-bank market-makers are both clients and competitors to the banks, and at a certain point they will become clear competitors," said one senior foreign-exchange banker who is familiar with the plans.

Some bankers are also unnerved at the prospect of splitting the core flows in the market onto an extra trading venue.

The banks behind the project will approach technology firms, asking them to pitch to build the new system, next week, two people familiar with the situation said.

All of the top-10 banks in foreign exchange declined to comment for this story.

Those banks are, in order: Deutsche Bank AG, UBS AG, Barclays Capital Plc, Citigroup, Royal Bank of Scotland Plc, JP Morgan Chase, HSBC, Credit Suisse Group, Goldman Sachs and Morgan Stanley.

According to benchmark data compiled by the Bank for International Settlements, banks account for 35% of spot foreign exchange trading each day.

This year's survey by the BIS showed that so-called "other financial institutions" - a term that encompasses non-bank market-makers among other firms - generated heavier flows than banks for the first time, with a 51% market share.

London taxis trial Oyster-style payment scheme

London black cabs are being equipped with a payment system similar to the contactless Oyster card that is used on the capital's public transport network.

The scheme, which is being masterminded by card company Visa, allows passengers to swipe their contactless debit or credit card against a reader in the rear of the cab.

The system only allows the contactless payment method for fares up to £15, and is only for the contactless Visa cards at the moment – not Oyster cards themselves.

Passengers will also be able to use the more conventional chip and pin method to pay for their journeys, and the new terminal means they will be able to do so in the back of the taxi without handing their card to the driver. The system will be trialled on 80 cabs.

Transport for London is supporting the scheme, and a spokeswoman said it was welcome as it fits in with their safer travel scheme. "We welcome it as it will mean people won't have to stop off at cashpoints on their way home," she said.

Kulveer Ranger, the Mayor's transport adviser, said: "It's fantastic to see our iconic black cabs leading the way with the latest in 21st century technology.

"More and more passengers are keen to pay for taxi journeys by card, and this makes the whole experience more efficient.

"I am delighted that London's taxis are leading the way with this new type of technology, making taxi payment less taxing and allowing passengers to relax and enjoy the banter with our world-famous London cabbies."

Top 3 Payments Trends for 2011

The payments landscape is poised for big changes in 2011. The top three trends expected to have the greatest impact: payments facilitated through social networks, partnerships between financial institutions and innovative non-financial vendors, and investments in new options for mobile transactions and Automated Clearing House.

From a mobile perspective, the expected adoption of the EMV chip & PIN standard, as well as heightened use of prepaid cards, will play significant roles, too.

The EMV discussion is not new. Some industry experts, including Randy Vanderhoof, executive director of the Smart Card Alliance, say mobile and EMV-like chip payments go hand in hand.

"By 2011, we can expect to see more NFC (near-field communications) enabled devices," Vanderhoof says. Once that happens, the connection between mobile and contactless chip payments will be bridged. With an estimated 75 million contactless chip cards already in use in the United Sates, Vanderhoof says it's time for the payments industry to have serious discussions about linking contactless and mobile.

From the prepaid angle, the link to mobile has already been established, and competition is closing in, says Cindy Merritt, assistant director of the Federal Reserve Bank of Atlanta's Retail Payments Risk Forum. "We're seeing a lot more activity on the part of telecoms, which are starting to provide services on a prepaid basis via the mobile channel," she says. "They are allowing consumers to make payments and have those payments appear on their phone bills."

Most banks and credit unions are aware of EMV and prepaid trends in mobile. What financial institutions do not seem prepared for, however, are innovations in social-network payments and advances in ACH.

Here's a look at 2011's top projected trends:

1. Payments via Social Networks

Richard Oliver, who heads up the Retail Payments Risk Forum, says, "I think you will see more and more innovation from entrepreneurs who are coming up with new things, and a lot of that will revolve around payments." 2010 saw the birth of payments innovations; 2011 will see the fruition of those innovations, he says - particularly via the use of social networks such as Facebook.

"It may be virtual currencies, like Facebook credits," Oliver says. “It has everybody looking around, saying, 'Is this real money?' And, if it is, 'What should we be worried about?'"

As payments convergence takes place, Merritt says, mobile is at the center. Beyond mobile banking, mobile access to social networks has been a natural evolution -- one that has introduced new and unanticipated risks. "Payments are quickly migrating from paper to electronic format," she says.

That electronification has made payments more efficient and more risky. "How are we going to follow the money when the trail is in a digital versus paper format, or is going over the airwaves, and we're worried about gaps in regulatory oversight," Merritt says. "As telecoms in the US partner with financial institutions, there are questions about how they'll share the revenue, as well as responsibility for consumer protection."

2. Partnerships for Innovation

But partnerships with telecoms comprise a fraction of the concerns banks and credit unions will have to worry about in the year ahead, says Avivah Litan, a distinguished analyst and vice president of Gartner. "The emerging mobile channel is going to catch them off guard," she says. "Where mobile payments are concerned, I don't want to say banks will be taken to the cleaners, but I think that's where their biggest threat is."

Pointing to emerging payments providers such as Bling Nation, an innovator in mobile NFC payments, and the connection those providers are making with social networks, Litan says banking institutions might get bypassed. "I think the banks are very threatened by NFC mobile payments," she says. "What Bling Nation is doing sounds to me like what PayPal was doing a few years ago. They have a lot of energy and they have a revolutionary concept. There's not much the banks can do without Visa and MasterCard to combat that innovation."

Catering to the "Facebook generation," Litan says, will give payments innovators such as Bling Nation a leg up. With a flat 1.5 percent transaction fee, Bling Nation's platform is a win for the merchant and a win for PayPal, since Bling Nation brings PayPal to the point of sale. "They really get it," Litan says. "They've negotiated (interchange) rates down for the merchants, and they are working with PayPal, who rides along with the credit cards."

3. ACH Advances

Traditional players such as NACHA - The Electronic Payments Association also are taking stabs at payments innovations. George Throckmorton, the managing director of NACHA's Advanced Payments Solutions, says NACHA's new payments service, Secure Vault Payments, relies on Automated Clearing House rails for one-time payment transactions. The most interesting innovation on the part of NACHA: Secure Vault takes debit and credit out of the equation.

"For one-time payments over the Internet, typically, debit and credit cards are used," Throckmorton says. "But some consumers felt unsafe, so some billers have made a decision to offer an alternative way for consumers to pay."

Secure Vault works like a one-time online payment a consumer might make to his financial institution. But instead of going to the institution, the payment goes to the online merchant. It's a direct payment, facilitated through the financial institution, so the merchant has no need to request or capture any of the consumer's personal financial information. The merchant merely collects the payment, which is routed through the bank.

"We believe that the ACH network is strong enough to provide these types of payments," Throckmorton says. "The ACH network could expand. And our role at NACHA is not going to change."

As ACH and wire fraud incidents grow, more secure ACH payments options will catch on, says Adam Dolby of Gemalto, a security company that focuses on smart-card and chip-card technology. "The security challenge has been around ACH, because you typically have a batch of transactions," he says, "and there is no way to really go in and check all of those transactions individually."

Tokenization could help, but financial institutions need to invest in protecting the entire transaction chain. "We need to look at it from a security perspective, to defend against technology-based attacks," he says. What NACHA is doing through Secure Vault responds to part of that problem. "Protecting the entire transaction, to me, has been a very big challenge for banks," Dolby says. "If you look at what's been deployed for cash management today, it has no tie back to what you're trying to move, and that's the problem."