More than one week later than expected, this second article will start not from the point where the previous one ended, but some of its implications.
Specifically: I referred to the potential side-effects of initiatives such as the enforcement of mobile number portability and SEPA, the not-so-new-but-yet-ill-known first step toward a EU-wide unique financial space extended beyond the corporate world.
A missing piece of the puzzle is the increased need, due to obvious security concerns, to be able to share information that used to be accessible on a national level within our EU- and I enclose the recent announcement of other structural changes to increase the internal and external cohesion.
Of course, including the introduction of the normative and structural changes due to the Lisbon Treaty.
This article is focused on potential short-term changes that could produce significant direct and indirect benefits.
Incidentally- most of the direct benefits would be delivered to end consumers, while some of the indirect benefits could enable a better modelling and monitoring of systemic risk.
Tomorrow, an article focused on institutional changes.
In both cases- a crisis could be a blessing in disguise, helping to crumble some barriers to change.
By levelling the internal market and legal system, while at the same time getting the EU citizen closer and more interested (for various reasons) with the EU-level sausage making processes, also the EU R&D can be a tool in creating cohesion mechanisms that transcend the traditional “top down” (EU, Member States, local Governments) approach.
As for SMEs, a typical example: years ago, I was able to compare the banking costs for a limited company in half a dozen of EU members (I mean- out of 12).
Is there any reason why a company, say, in country A should pay 20 times what it would pay in country B, for the same current account (with no credit facilities)?
Until recently I would have said, emphatically: yes, as we still lacked EU-wide transparency.
But between IAS, SEPA, and new security rules, now you can bank in any country- once few steps more are done to allow enforcing a EU-wide risk and financial transparency.
From virtual states to virtual residency
Our EU is a quickly becoming a-state-in-anything-but-name: shared economic policy, defense, legal framework, and, for a significant (economically and demographically) part also with the same currency.
Hence, the first half of the title that I selected for this section.
But we live in a technological era: and while the financial markets have been global since shortly thereafter the introduction of the first undersea communication cable 160 years ago, our high-speed, high-bandwidth cables (from Apollo to ITUR to Yellow) remove the concept (and value) of distance.
For people, it is still a marginal phenomenon: you can, say, live in Brussels and work in Lille or Paris or London- it takes more or less the same time, via high-speed train, than travelling from one side of Paris to the opposite side using local transport.
But for SMEs, it could already make sense: a large company can afford to have local branches, while SMEs have to pay an hidden tax, i.e. supporting a local intermediary, while distance is now really irrelevant, on a EU-scale.
What is missing? When I started working in banking, some employees still talked about the old meaning of “check truncation” – cutting the paper-based cheque to avoid its reuse, and exchanging packages of cheques between banks.
Eventually, technology advances allowed to reduce the time-lag up to the point where, for most companies, having cheques was just a nuisance: a wire-transfer, now free, is more convenient and secure.
If company A operated in few countries (A B C, where A is the EU Member where the company is registered), it should still consider the agreements between countries, or even, in some case, found that it was simpler to have a figurative local branch (creating a market for “virtual office” companies).
But if transfers between companies were to be done only via wire-transfer, it would be easy, transparent, and confidential to have a EU-wide system automatically informing the authorities of the countries involved (I wrote something about this in a prior article).
The savings? Streamlining the supply chain, by removing the need of the usual safeguard- a local intermediary..
Getting back to the point where I left in the previous article, SEPA and other cross-EU initiatives enable a dis-intermediation.
Again, by focusing on compressing the supply chain.
Think about it: how many banks do you know that “downsized” their distribution network?
And how many telephone operators are really “administrative companies with a brand”?
Integrating virtual utilities
Which company does need a local branch?
Mainly: the one that delivers physical goods.
Also those traditionally requiring to keep individual, face-to-face relationships with their customers, “outsourced” so many of their activities, that you could often remove their local presence without affecting the services delivered to their customers.
As the knowledge left at the branch level often does not extend beyond the “checklist-level”.
How do you differentiate yourself from your competitors? Typically, you “package” your products and services, identify specific service profiles that target a certain segment of your potential market, and so on.
Knowing that you will surrender other segments to your competitors.
I will not discuss here the potential anti-trust issues embedded in “competition desistance” that is part and parcel of some puzzling fees and prices.
If you enforce SEPA, anti-money laundering, transaction traceability, and so on, you start shifting banking-style regulations from the banking industry to anybody involved in financing end consumers.
A way also to close few loopholes left by the decision to allow cash-based money transfers, shifting from banks and State-owned post offices to almost any private entity able to comply with some basic requirements.
Without any real limitation on who they can delegate the cash-processing activities: a global back-to-back, for a small commission.
In Italy, years ago, tackling with systemic risk meant expanding the central risk data bank managed by the Bank of Italy with ancillary data collection activities- extending beyond the banking industry.
With SEPA (and other forthcoming integration activities), Basel III, and, who knows, a Basel IV considering upstream and downstream risk management, including also anti-money laundering into a finer tuning of “risk prevention/management”…
…any organization above a certain size could be required to actually disclose information affecting risk (a retailer delivering 1000 EUR in consumer credit to 10,000,000 customers across EU is managing 10 billion EUR- more than many smaller banks!).
Already supermarket chains allow, in many countries, the “cash back” option- it is via an intermediary (the bank or credit card company), but it is a service that was usually done by banks.
Large retailers have anyway in-house the knowledge and technologies required to efficiently manage their own risk and financial resources, down to the individual shop (including franchisees): or do you think that assortment planning in your favourite megastore is done manually?
I worked in DSS, controlling, data warehousing and business intelligence in various industries since late 1980s: and retailers were often referenced for the first terabyte-sized databases, data mining (a kind of “electronic fact-finding mission”), and other applied statistics activities.
It is but a small normative step away from enabling retailers to actually operate at the cash counter as if they were retail banks, and create innovative services.
Just two examples: for loyalty card holders with a certain level of purchases, a pre-salary financing (anyway- retailers traditionally pay their suppliers with a certain time-lag, so they would have no additional costs, and significant benefits from managing their own cash-flow).
If the retail side of consumer banking were to progressively shrink, the actual integration of the information that retailer routinely collect on their customers with financial information would enable to identify potential risks- and by freeing resources for banks , would allow few of them to operate as some telecom routinely do: procure resources wholesale, and generate margin by selling retail.
Incidentally- and maybe consumers will get more than the usual 1-1.5% in real discounts that they obtain by surrendering their own purchase profile and interests by using their loyalty cards; who knows, by getting additional discounts if they spend more than X% of their income using a specific loyalty card.
Virtual residency and portability
I wrote already in the previous article that distance is having a decreasing meaningfulness: at the speed of light, do you really believe that paying more because you are calling somebody 1000 or 2000 km away makes any sense?
Instead of paying roaming costs, you could factor in pricing a statistical variance between location, distance, and access prices to use the local infrastructure; and create a transparent online database of real-time access costs.
In most EU countries you can already buy mobile phone SIM cards that convert the post office into a “virtual” operator- using the services of a traditional operator
With the unintended nuisance that, often, the access to value-added services is not “filtered” by the post operator, but relies on the applications delivered by the supplier- and when, for whatever reasons, the post operator switches telecom supplier… customers have to learn a new command code :@
Large, vertically integrated operators have a significant disadvantage: whenever they deploy an upgrade to their infrastructure (e.g. the 3G), the roll-out takes time (otherwise, they would need infinite resources available on stand-by to upgrade instantly their own network).
See 4G: companies in the EU paid huge costs for the 3G licenses, and just enabling 3G roaming took seemingly forever (in technology, “forever” could sometime compress to mere months!).
They still had to recover the investment of the previous investments (and text-based services were an unexpected success- with no 3G-based value-added services to replace them).
I remember that a major hurdle to the development of some online e-commerce startups that I supported (micro-payments, i.e. allowing to spend a minimal amount, and enabling therefore “impulse shopping”) was the cost of each transaction, if you were using a standard credit card.
Some telecom operators and telephone producers introduced text-message based payment systems, blurring the line between industries (yes, at first to sell idiotic ring-tones and other “primary” services, but eventually also parking permits, transportation tickets, and so on).
But that was still an approach considering just the “supplier side”.
In 2011, maybe our smartphones could do something smarter than just show YouTube videos.
As an example: what if each smartphone were to dynamically assess which network to connect with, with a kind of “instant auction”, potentially down to the single unit of transmission size (minute, second, call)?
Moreover: smartphones can be updated via software, while technology advances allow to create smaller and smaller cells (e.g. “femtocells”).
Removing the “territorial factor” could enable viable micro-operators, who could then experiment with new value-added services as a kind of “loyalty benefit” for their local customers, following past experiments on creating operator-less Consumer-To-Consumer free WiFi (e.g. in Austria and Denmark), but extended to “access ramps” to traditional network (call it “portability on steroids”, instead of just waiting for 4G to be deployed).
Why not? By further liberalizing this access, technology producers could offer to some “trendy” venues (cafes, etc), known for their specific demographic target, to “host” test services, and “smart” phones could immediately make those services available.
In banking, SEPA allows to associate the country to the bank to the account- with a shared coordinate system (IBAN+BIC/SWIFT).
But, in the end, also the “country” could be redundant (assuming that what I wrote before about risk and anti-money laundering/transparency/confidentiality is taken into account), albeit kept for security reasons while the rules still allow (or, better, delegate to the) national-level controls to be enforced.
The same applies for mobile phones: you would not need physical separation by country, etc, if there were a shared legal framework enabling enforcement of specific rules (e.g. disabling certain services for phones within a certain area during a disaster, to avoid overload).
By streamlining the legal framework (again, creating a “basic rule set”), micro-operators (my English readers will recognize the inspiration: micro-breweries) could innovate products and services: both in retail finance and telecom.
And maybe also in other industries.
