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Gottfried Haberler’s contribution to trade theory

17 Feb

Gottfried Haberler was a member of what is loosely termed the ‘Austrian’ school of economics, to denote the group of theorists who opposed centralised – government – intervention in money creation, which they argued artificially distorted capital flows and created structural inefficiencies.

He was more closely tied to the Austrian school at the beginning of his career, when while in that country he was a regular contributor to the seminars organised by Austrian economist Ludwig von Mises; as part of the Mises-Kreis, the celebrated group of economic, sociological and philosophical thinkers.

In what was, for the time, a departure from the orthodox theory of value, quantified it in terms of labour and output, the Austrian theory of value focused on the process of production itself. And how in electing to lend part of the finite amount of money to certain industries over others, there was a danger of creating structural inefficiencies which would self-correct over the course of the business cycle.

A Pioneer in Trade Theory

In the 1930s Haberler was instrumental in creating an alternative framework for analysing cost and value, moving away from the theory of comparative costs (advantage) on the single-product model which had underpinned trade theory since Ricardo. Haberler’s framework mapped out the relationship between the opportunity cost of producing two competing goods, under a given supply of productive factors. This he performed both for constant and fluctuating opportunity costs.

Previously orthodox theory had been based on the ‘real-cost’ theory of value, which saw prices as quantified largely in units of labor. The new approach enabled the determination of relative prices to be analysed under more realistic production circumstances as variable factor productions, in a much simpler and more direct manner than under a real-cost approach.

This paradigm shift triggered a wave of writings by other academics, which incorporated and expanded Haberler’s theory, like Lerner (1932, 1933, and 1934), Leontief (1933)  and Viner (1937), who introduced ‘social’ or ‘community indifference’ curves. When these two curves – those of opportunity cost and social indifference – are plotted together – Marshall’s reciprocal demand curves can be derived; and most general equilibrium effects of trade on relative commodity prices, production, and consumption then shown.

What Haberler’s analysis did not include was an attempt to model consumer preferences for the commodities being produced. Nor an explanation of how productive factors evolve as an economy moves along its production-possibilities curve. This would have to wait until Stolper and Samuelson (disciples of Haberler) published their ground-breaking article in 1941, which elucidated more fully the way the production-possibilities curve is determined, and how factor proportions fluctuate along the curve.

 Where Trade Theory Fails

Haberler’s 1950 work, ‘Some Problems in the Pure Theory of International Trade’, examined the less-than-ideal situation of real wage rigidity, which can be caused by insufficient mobility of labour between a developed and less developed sector; one of the scenarios examined by economists who later expanded his model. This article formed the precursor for an extensive body of literature on ‘domestic distortions’ in which orthodox theories of trade relations might be non-applicable.

The consensus that in the majority of situations free, unimpeded trade has a net benefit did not change dramatically. The theory so-called Hicksian optimism rehabilitated the argument for free trade largely on the basis that wider availability of goods and increased competition leading to cheaper prices would yield a welfare gain; the need for protection arises only when there is a market failure in the domestic economy. Where there is a domestic divergence between prices and marginal costs, foreign competition can hurt some domestic industries.

In the event of real wage rigidity, the opening-up of trade – whether in a full customs union or a free trade area – could cause loss of output. Industries which for whatever reason are unable to pay a competitive rate which attracts new workers would be threatened by removing tariff barriers, which would allow unimpeded entry of competing products.

As the marginal return on these products became unviable, but wages were not flexible enough to change accordingly, labour would move out of these struggling industries and into more competitive ones. Often the industries that suffer are those at the breaking edge of new technology and development, which lacks a mature labour pool with the necessary skill set.

Let’s Get Technical

In his econometric model Haberler demonstrated that increased availability of products and a wider market to stimulate output had a net benefit, provided this increase was to the right of the domestic indifference curve.

In trade theory the state of ‘autarky’ is where the factors of production are deployed to their maximum potential, accounting for the limiting factors of the opportunity cost of manufacturing that product over another, which are assumed to increase; and a community indifference curve which has an inverse relationship to the opportunity cost curve, (increasing where there is scarcity of a particular good’.

The material gains from trade are represented in graphical form by the international trade ratio. In a model comprising two exchangeable commodities, this describes the amount of commodity A that can be exchanged for commodity B. If commodity A buys two of commodity B abroad, but at home you need two of commodity A to get one of B, then domestically A is more valuable. Therefore B should be exported.

However, Haberler has a caveat. If T, the international trade ratio representing the increased availability of goods from trade, is such that there is a net outflow of goods, that “these imperfections are persistent, … and that they persistently operate in such a direction as to weaken (rather than to strengthen) the case for free trade,” protection might be justified.

His idea of a desirable welfare position is not an overly naive one in which all individuals are necessarily better off, but “it is sufficient that everybody could be better off.” He distances himself from the idea that “perfect mobility of factors within each country is a necessary condition for the ideal classical model”, going on to assert that “what really causes trouble and may make trade detrimental and justify protection is rigidity of factor prices, which may or may not be associated with immobility of factors.” The most likely factor to experience difficulty transitioning between industries is that of labour.

Expanding this theory further, Brecher (1974) examined a number of scenarios involving real wage rigidity, starting with one in which free trade was combined with unemployment; he analysed the consequences of using different policy instruments. If the importable is labour-intensive to produce, a tariff would increase employment and output, by shielding domestic industry. But capital and labour would move disproportionately into the protected industry; also there would be a by-product consumption distortion.

When the demand for a product, reflected in its price, is proportionate to the marginal cost for each firm and product, there is zero distortion. But protectionism can mean the output swells beyond sustainable consumer demand, as that industry is protected from foreign competition and, more indirectly, may benefit from tariff revenue.

The Austrian school holds that distortions of this kind inevitably self-correct over the course of the business cycle, and ‘creative destruction’ can mean boom-time companies do not survive when they lose policy protection.

The second scenario Brecher modelled was polarised between a subsistence, and an advanced sector, where high skills and/or costly technology necessitated a wage rate in excess of the opportunity cost of labour – i.e. higher than the marginal product of labour in the subsistence sector. To phrase it in plain English, these advanced sectors would have trouble attracting capital which could be profitably employed in more basic industries.

This form of domestic distortion, he argued, necessitates subsidies in place of tariffs or taxes on trade. Because the revenue effect is negative and so higher distorting consumption taxes are needed, he acknowledges the extent of the offsetting subsidies may have to be incomplete.

The distortions not offset are weighed against the new distortions created as a consequence of financing the subsidies. While not a perfect solution, he concludes it is ‘first-best’, the most beneficial option, to deal with distortions in this way.

This theory of ‘domestic distortions’, which Haberler led the field in, is admittedly a far cry away from his origins as an Austrian School disciple, a staunch defender of the principle of unimpeded trade. This just goes to demonstrate his intellectual versatility and ability to break with orthodoxy and form new approaches.

But today it might be time for a new school of thought on the subject. As is so often the case in institutions where collective decision-making is skewed by relative economic and political weight, the WTO is governed to a large extent by the vested interests of the countries with the biggest economic muscle. Trade or customs unions like that existing within the EU and the proposed Trans-Pacific Partnership (TRIPS) which Trump made guillotining one of his first official presidential acts, only yield a net benefit to those participating in them.

For those countries outside the golden circle, they can face significant obstacles to equitable trade not limited to tariffs; customs’ scrutiny of imports is far lower, for example, within the EU which has a unified legislative framework to enforce commercial and legal standards. Trump’s announcement of his intention to renew the North American Free Trade Agreement is another step towards his avowed position as a champion of ‘free trade’[1] and greater competitiveness.

 

Bibliography

http://www.pressherald.com/2017/01/23/trump-signs-order-to-withdraw-from-trans-pacific-partnership/

‘The Normative Theory of International Trade’ – W. M. Corden, Australian National University, Canberra  (Seminar Paper no.230)

‘Gottfried Haberler (1900 – 1995)’ – Joseph T. Salerno.   https://mises.org/profile/gottfried-haberler

‘Some Problems in the Pure Theory of International Trade’ – Gottfried Haberler, 1950

‘Gottfried Haberler’s Contributions to International Trade Theory and Policy’ – Robert E. Baldwin, The Quarterly Journal of Economics vol. 97, No. 1 (Feb 1982), p.141-48

 

[1] http://www.pressherald.com/2017/01/23/trump-signs-order-to-withdraw-from-trans-pacific-partnership/

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Bringing Science Back to Surveys

27 Mar

Increasingly it is becoming obvious to the financial community that CSR criteria are something they cannot take lightly and form an important part of commercial companies and investment funds’ reporting of their respective ‘successes’.

But simply surveying ‘investor attitudes’ is not an effective or, at any rate, empirically sound way of gauging their CSR priorities. Should a company focus on managing its carbon emissions, or having a flawless labour relations record?

Literature Review

Indeed, academic consensus shows organisations that tackle stakeholders’ concerns, over public approbation, achieve greater returns than firms that fail to address these interests. Manrai and Manrai (2007) demonstrated the success of this priority in reducing customer churn; Sweeny and Swait (2007) on how it increased share and profits. McDonald and Rundle-Thiele contended in their paper that customers, though, were not satisfied by corporate social responsibility (CSR) initiatives – which might be costly – as much as by dramatic-sounding but essentially superficial actions like preventing child labour, or other human rights abuses.

These considerations ranked highest in customer satisfaction levels, according to the authors after examining banking industry surveys. Furthermore, they found community support, i.e. “offering customers in low socio-economic groups fee-free accounts and low-interest loans, banks’ support of their employees’ volunteer activities via paid leave and flexible working arrangements” resulted in the lowest customer satisfaction. Other important sustainability measures, “reduction of water and energy consumption, carbon offset programmes, recycling and use of recyclable materials,” delivered the third-highest level of customer satisfaction

Questions of Reliability

Survey responses, though, are not the most reliable means of gauging an individual’s true opinion, as respondents usually know the purpose of the survey so they might be inclined to slant their responses in a ‘helpful’ direction. Another potential – and major – source of bias arises from participants’ desire to present themselves and their firm in the best possible light. This could be an unconscious source of bias even when responses are anonymous.

Examples abound of surveys linked to plush events with a hefty price tag, where participants are wined and dined and soothed into a compliant mood by keynote speakers who promote a sense of inclusion around common issues. An even more blatant example of ‘priming’, as psychologists term the process of activating certain of an individual’s emotions and short-term memory cells, is the Award Ceremony where everyone unites in an orgy of back-patting and self-congratulation.

Making Surveys more Scientific

Isn’t it time someone initiated a rigorously scientific study into stakeholders’ real unbiased opinions? Academic psychology studies are carefully crafted to minimise all possible sources of bias; and the results, when analysed, are not simply tested for correlation or with regression analysis, which imposes a series of ‘logical’ mathematical assumptions to determine constants that support its own self-generated model. Assuming, that is, that the ‘error term’ is zero, a fact which is rarely if ever true for real-life models.

Let us say that we initiated an experiment with controlled variables whereby we divided participants into three groups whereby each was exposed to the following conditions:

  1. Played video/ shown slides about two companies’ efforts at reducing and effectively reporting their carbon emissions.
  2. Played video/ shown slides about two companies’ efforts at providing favourable work conditions – flexible hours, home working, travel bursaries, sponsoring further vocational qualifications.
  • Played video/ shown slides about two companies’ efforts at providing grassroots investment to local communities affected by their activities.

At the end, each was given an assessment card where they recorded their perception of each company’s level achievement in each area, from a scale of 1 to 10. At the end, – and this would be the experiment’s overarching objective – they would be questioned about whether they thought the company scored highly for CSR criteria, whether they thought it represented a good long-term investment, and its perceived risk level.

These experimental conditions would need to be replicated across a number of samples, such that the results started to follow a normal distribution. The assumption of the homogeneity of variances between samples is a key tenet of the statistical test you are about to perform, but corrections could be made if this is not entirely the case.

Levene’s Test tests the null hypothesis that the variances of the groups are the same. If Levene’s test is significant (i.e. the value of significance is less than 0.05) then the variances are significantly different meaning that one assumption of the analysis of variance has been violated.

The formula for Levene’s Test can be found here

https://statistics.laerd.com/statistical-guides/independent-t-test-statistical-guide.php

You could then perform an analysis of variance, to determine the difference between systematic and unsystematic variance. For a full walk-through of how Analysis of Variance is performed, with or without the aid of stats software, stay tuned for my next blogpost …

 

Remember also that psychologists have to control for multiple sources of bias, for example:

  1. Selection bias. Measures should be taken to ensure demographic factors which might influence a subject’s opinion or response, such as age, income bracket, social ethnicity etc are controlled for.

If different participants are used for different experimental conditions, a method for allocating interventions to participants must be laid out in the report, based on some chance (random) process, i.e. sequence generation. Moreover, steps should be taken to prevent foreknowledge by participants of the forthcoming allocations.

 

  1. Performance bias, defined as systematic differences between groups in the care that is provided, or in exposure to factors other than the interventions of interest. Many studies are designed such that the actual thing being measured is concealed under an alterior objective which is presented as the subject of study.

 

The aim is to reduce the risk that knowledge of which intervention was received, rather than the intervention itself, affects the results. Often the assessors are also ‘blinded’ as to which participants have received which condition, to prevent them unconsciously biasing the outcomes.

 

  1. Detection bias, defined as systematic differences between groups in how outcomes are determined. In recording a subject’s reactions, if the evidence is qualitative rather than quantitative an assessor can unconsciously predicate the desired result. Again, blinding (or masking) or outcomes assessors may reduce the risk that knowledge of which intervention was received, rather than the intervention itself, affects outcome measurement.

 

  1. Reporting bias refers to systematic differences between reported and unreported findings. Within a published report those analyses with statistically significant differences between intervention groups are more likely to be reported than non-significant differences.

The_Normal_Distribution.svg

 

How does a “soft pull” affect your credit score, and your ability to participate in P2P marketplaces?

14 Jan

14/01/16

A ‘soft pull’ or ‘soft inquiry’ is when an institution, or indeed yourself, does a credit check on you without it affecting your credit score. If you were applying for a loan and the bank did a ‘hard pull’ on you, and you were subsequently denied the loan, this would stay on your permanent credit record.

A hard pull resulting in a failed application would likely lower your credit score, because if you already have debts owed and are making further loan applications, this would make you a less attractive applicant.

Many organisations can ask for a ‘soft pull’ on your credit record, including P2P lenders. A potential employer can ask your permission to do a superficial credit check on you. Financial institutions you already have an account or relationship with check your credit; and credit card companies that want to send you preapproved offers check your credit.

What kind of checks do P2P lending forums perform?

The level of scrutiny a marketplace lender will put a potential applicant under varies greatly depending on the loan provider. Some target the upper tier of borrowers, while others offer sub-prime loans to those with credit scores too low to allow them to qualify anywhere else.

Some hire bespoke credit database companies to do an in-depth background check on applicants, usually if they are the company CEO and it is a business loan; other, perhaps less discerning, lenders stick to the three main credit reporting bureaus, Equifax, Experian and TransUnion.

Avant is an example of a company which deliberately targets applicants with low credit scores, offering them the chance to “repair” their credit score with a history of prompt loan repayments. Naturally applying for a loan with Avant, the company assures consumers, will not affect their credit score.

FICO (Fair Isaac Corporation), the independent industry body which is responsible for pooling the scores of the three credit scores from Equifax, Experian and TransUnion, warns that loan companies promising quick-fix solutions to a credit score are making empty promises.

The company does warn applicants that the interest rate on the loan they take out will be more favourable if they have a good credit record. It uses this as incentive to borrow, in the hope of ‘saving money’ in the future:

“We’ll send notice of payment history to the major credit bureaus which may improve your credit score with timely payments. As your credit improves, you may be eligible for lower rates on subsequent loans through AvantCredit.” Note that the representative APR is a hefty 48.5%.

It is true though that timely reporting to credit bureaus of prompt repayments on a loan might in the long run make a borrower seem more trustworthy. But if you are only looking to improve your credit score, remember that much of your scoring comes from paying bills on time (about 35%) and how much outstanding debt you have. Factors like drawing on a range of different forms of credit (e.g. credit card and long-term loan) comprise around 10% of your score.

Social Selection at Social Finance

Social Finance inc. (SoFi) carefully selects its borrowers, assessing a range of financial and cultural factors to determine not only the applicant’s creditworthiness, but also effectively their social status. It asks questions about their education and their career experience, as well as monthly income vs expenses, and obviously their financial history.

SoFi likes to keep loans within the SoFi community, operating a subtle social streaming process. It offers cash rewards for successfully referring a friend. Previous loan applicants can share a referral link to let someone else refinance their student loan or take out a personal loan.

The platform also mentors newly graduated entrepreneurs through the SoFi Entrepeneur Program, and here some of the application questions are indicative of the parallel socio-cultural assessment. The company is asking itself, “Is this individual a long-term investment?”

Such questions include details like the name of school the applicant graduated from, and details on their employment such as “Are you a founder/ co-founder?” and “Are you working full-time?”.

In Conclusion

The question is how thoroughly the organisation manages its data, and if it sells it to a third party. Information in this industry is currency, and there is no guaranteeing the privacy of everything you disclose in an application.

Consider that, while the Federal Housing Association (FHA) says anyone with a credit score of 500 can apply for a mortgage loan, 97% go to those with credit scores of 620 or over. While a ‘soft pull’ will not affect your permanent credit score, there is no guarantee the information unearthed will in no way affect your application for a marketplace loan.

 

 

Marketplace Lending – A High-Risk Investment? Too Soon to Tell

13 Jan

09/12/15

Where banks must make full disclosures of their capital adequacy ratios (under Basel 3) – and, in their annual report, the current market value of all their assets and liabilities including derivatives, – marketplace lenders have far less transparency obligations.

Key names such as Borrowize, Accion, Fundera, Multifunding and others are seemingly not financially significant enough to be required to publish annual reports on the SEC’s electronic filing system EDGAR. The information is not readily available on their websites. And they do not willingly give such information to journalists or inquisitive citizens.

For those of whom the majority of their investors are private institutional clients, they admittedly have no real public obligation. But those marketplace lenders whose primary stakeholders are retail investors arguably do have a duty to give some detail on how they manage the key risks of conducting their conducting their business.

Market Risk

This we will broadly define as the risk that an asset will decline in value due either to macro conditions, e.g. change in interest rates; or some underlying change in the asset class, e.g. a certain number of loans defaulting on payments.

Lending Club is typical of many marketplace lenders, in that it offsets its exposure to the loan pool by selling notes, equivalent at the time of issuance to the value of the loan, to its institutional partner. Lending Club collaborates with Utah-registered WebBank, partly to take advantage of Utah’s lax stance towards interest rate-capping. But many lenders have a wider range of institutional partners.

In its 2014 annual report, Lending Club explains away its market risk thus:

“Because balances, interest rates and maturities of loans are matched and offset by an equal balance of notes and certificates with the exact same interest rates and maturities, we believe that we do not have any material exposure to changes in the net fair value of the combined loan, note and certificate portfolios as a result of changes in interest rates. We do not hold or issue financial instruments for trading purposes.

 The fair values of loans and the related notes and certificates are determined using a discounted cash flow methodology. The fair value adjustments for loans are largely offset by the fair value adjustments of the notes and certificates due to the borrower payment dependent design of the notes and certificates and due to the total principal balances of the loans being very close to the combined principal balances of the notes and certificates.”

In order for the loans’ value to continue to equal that of the notes and certificates, the debt trading forum must ensure prompt resolution of any delinquent debts. But they do not generally have the right to forcible repossession of goods to the sum of what is owed. Fixed charges placed over assets owned by the debtor would make up part of the money owed.

But how many actively are the loan issuers ensuring collateral is posted?

Collateral Posted – A Mixed Bag

Intersect Fund and Copperline, in response to our inquiry, volunteered information about their policy on collateral, and on their credit checks. The contrasting policies of these two respondents clearly demonstrate that there is no fixed industry standard on either point.

When asked under what circumstances they would require an applicant to post collateral, Intersect Fund explained: “We use collateral as a compensatory factor for recent credit blemishes and overdrafts. We don’t have a LTV (loan to value) minimum and it depends on how strong the applicant is in other areas.”

Intersect Fund makes a policy of taking four character reference numbers, in addition to running a personal credit check through TransUnion. For Copperline, “Personal credit reports (from Experian) serve as character references”.

The ‘insurance policy’ of Copperline is also more relaxed, and typifies the more liberal end of the lending market. A spokesperson summarised, “We only require collateral if the client is purchasing equipment in which case we take the said equipment as collateral. We never take additional collateral.”

In sum

While all marketplace lenders take measures to counter the risk of delinquency and default, there are limits to the measures they can take to recover missed interest payments. Fortunately there is an ever-expanding supply of fresh loan applicants to keep their portfolios at full value.

Furthermore, the actual sums at stake seem to indicate this risk is for now fully under control. To draw again on Lending Club’s 2014 annual report – this time a detail from the auditor’s notes – we can see that its ‘loan loss contingency fund’ of $1,824,739 is more than sufficient to cover the losses in its three main portfolios over the preceding two years. In fact, the maximum sum deficient, in 2012, was $512,395.

So the management has just cause to consider the loan loss contingency fund “sufficient” to cover all potential future losses from its portfolios.

 

 

 

 

Back to the Future: Bitcoin, Blockchain and how Marketplace Lenders are Using Technology to Overtake Banks in the Race to Attract New Lenders.

13 Jan

4/12/15

Encumbent institutional investors themselves admit that they have a lot of catching up to do before they can compete with the ‘upstart’[1] marketplace lending providers. A Morgan Stanley research paper published in June discussed how banks were hampered both by their due diligence restrictions, and by the backwardness of their big data analysis techniques.

Because the new marketplace lenders have less operating costs, they are attractive to borrowers as they are able to offer lower commissions; their risk assessment criteria are less exacting than banks, and they incorporate demographic data into their analysis. Thus they are able to offer lower interest rates to interested investors.

Morgan Stanley analysts wrote: “Traditional banks excel at originating loans and underwriting credit, but are slowed by the batch process and portfolio approach to their deposit and loan legacy systems, which are the backbone of the US and global payments system, and by liquidity and capital rules.”

Disruptive Innovations

As well as raising the bar in big data analysis, both for existing users and in targeting potential loan seekers, many in the marketplace lending sector have enthusiastically adopted Bitcoin and the blockchain in their payments system.

BTCjam was among the first forums to facilitate lending in Bitcoin. Founded in late 2012, in 2013 it gained a wealth of sponsors in Ribbit Capital, 500 Startups, FundersClub and the Bitcoin Investment Trust. By the end of 2014, BTCjam had facilitated bitcoin loans of over of $10 million in value, with more than 100,000 users in over 200 countries. The fact that its due diligence procedure only goes so far as an “optional soft credit check” helps explain its popularity.

Bitcoin and BTCPOP both offer bitcoin-denominated loans, of the ‘instant’ and collateral-tied variety. Loanbase, formerly known as BitLendingClub, specialises in bitcoin loans to developing countries, where beneficiaries might not have a bank account.

Why Not Create A New Currency With Your Payments System?

Another start-up has created an entire new currency, LoanCoin, which appreciates as interest is paid on a loan. Once the interest and principal are paid off, the attached LoanCoin is destroyed and exchanged for a currency of the Coinholders’ choice, so the currency value is preserved.

Within the system created by the developers Lending DApp, aspiring loan issuers, or ‘officers’, can source and guarantee new loans for Coinholders and charge fees for their service. Financial institutions, marketplace lenders, and even individuals can act as loan officers; though their commission and the size of the credit or ‘Trust line’ extended to them is dependent on their credit record. Lending is also at the issuer’s own risk and in the event of default or missed payment, the loan officer loses their collateral.

The Trust line is calculated by applying an aggregate function to its collected weighted trust ratings. The network is thus able to draw on the accumulated knowledge of its participants when assessing a loan officer’s reputation and creditworthiness. Percentage of performance fees is dependent on the difference between the risk-adjusted performance of the loans selected by the loan officer, and the mean risk-adjusted loan performance of all loans in the network.

Lending DApp, with its innovative decentralised business model, which relies almost wholly on pre-programmed systems, is typical of the new hybrid marketplace lending product, where banks and what we loosely define as “P2P” lenders co-exist to mutual profit.

Smittipon Srethapramote, who covers the North American payments industry at Morgan Stanley, confirms this is a growing trend. He says “The fastest growing marketplace platforms are not really peer-to-peer but institutional investors partnering with tech platforms to cherry-pick borrowers, often with offline marketing.”

 What The Future Holds

Max Rangeley, who works for the Cobden Centre, a thinktank which has been charged with creating a Bitcoin exhibition for the European Parliament, explains how the Bitcoin transfer system, the ‘blockchain’, might be adapted for other purposes. One potential use is to allow users to better insure the asset they use as collateral on a loan.

“Transactions can be conditional on any event which can be programmed into the blockchain (or even other events, if there is third-party verification whether the event occurred or not). Smart property (property registered on the blockchain) can be used either as collateral or for repo loans, are when the “lender” effectively buys the property from the borrower and sells it back to them at the original price plus interest after a specified period of time.”

 

 

 

 

 

 

 

[1] https://www.morganstanley.com/ideas/p2p-marketplace-lending

 

Argos’ New Online CRM Tool Prevents Unnecessary Sales Approaches

26 Mar

Ever received an unsolicited offer of help while shopping online? A speech bubble pops up with a determined sales assistant who is set on selling you not only the product you were casually browsing, but all its trappings, garnishes and attachments.

While not quite on a par with being smarmed up by a sales assistant whose offer of ‘help’ is a covert accusation that she suspects you of shoplifting, it is still irritating and can act as a deterrent to purchasing the product in question. These unwanted approaches can also drag at ecommerce sales figures.

www.argos.co.uk

Pioneering new ecommerce techniques

Argos appears to have solved the problem with its [24]7 Predictive Sales solution, which analyses online behavioural metrics to determine which customers are actually in need of advice in making a purchase decision, or who are in danger of ‘deviating from the “golden” conversion journey’, explains Nick Mitchell, Managing Director, EMEA, [24]7. The success of the this Customer Relationship Management (CRM) tool could mean Argos’ technical methodology could be widely adopted.

Neil Tinegate, Head of Digital Innovation, Argos said: “Our primary concern here is to offer human assistance to customers who need it, at the right time in the shopping cycle for them. We have seen this work in digital stores where colleagues are on hand to help customers get what they want, and this is a natural extension of that. Customers tell us they appreciate the help, so we plan to continue to offer the experience.”

The platform is able to accurately identify customers who are perhaps comparing products but are struggling to make a decision; or perhaps those looking at finance or after-care products to add to their purchase, who don’t know which one to purchase. “Those customers are offered a contextually relevant offer of assistance based on their intent and then connected to an Argos advisor through sales chat to offer help,” explains an Argos spokesperson.

Nick Mitchell explained further: “We believe in encouraging more contextually relevant conversations with those customers who truly need assistance, accurately predicting when to offer assistance and using real-time cross-channel behaviour to know what to offer. Results from the programme show this is allowing Argos to have smarter interactions with its customers, which in turn is driving measureable increases in incremental revenue.”

 

New Business Ideas from America’s Newly-Listed Entrepreneurs

23 May
IPO

Initial Public Offering – floating atop a pile of cash

Brilliant Business Ideas from across the Atlantic/ the Pond

Americans, it has been established, have a penchant for patenting the slightest innovation which could give their business a competitive advantage. The authors of a report on ‘The Impact of the Patent System on SMEs,’ by Adam Hughes and Andrea Mina, of the Centre for Business Research, Cambridge collaborated with MIT to find that small firms in the USA were twice as likely as those in the UK to patent innovations – though were still less likely to do so than larger firms.

A 2008 US study, which must naturally be viewed in the context of the financial crash, showed that although small firms accounted for just 8% of patents granted, they comprised 24% of the patents in the top 100 ‘emerging clusters’ of innovation. The study’s authors wrote, “small firms are much more likely to develop emerging technologies than are large firms”. An analysis of the 58 companies registering an initial public offering (IPO) this week on US exchanges demonstrates their ability to turn a profit out of almost any activity.

Prominent sectors were pharmaceuticals, with 10 of the IPOs being for innovative drugs, drug delivery methods or ground-breaking science. Of course, the millions, even billions of dollars it takes to bring a new drug to market take this area out of the remit of SMES. Similarly with investment companies or special purpose vehicles, which predictably dominate the list, forming 12 of the firms now publicly tradable.

Digital marketing and technology is where much cutting-edge thinking is targeted. Digital broadcast graphics are always in demand, as are apps-writing companies. In a different mould is TelUPay, which is pioneering mobile banking and has patented what it claims is a ‘bank-grade’ payment system. The group is ambitiously targeting banks, retailers, large corporations and mobile officers as its main user-base. It promises that “TelUPay’s bank-grade mobile banking and payment service uses the most secure encryption technology available today for both the bank and the end-user.”

Let us hope its central control hub never gets hacked, or those encryption keys could become much less secure. We are unsure if Goldman Sachs or Morgan Stanley will consent to allowing million-dollar transfers using some stock-trader’s iPhone.

Everyone can star in their own commercial!

One digital marketing company, Kitara Media, has chosen to specialise in video production and distribution. It believes film is the best way for a brand to connect with its target demographic, and not only through adverts; its offerings also include video slideshows, video surveys, video quizzes and video Q&As. Yes, you heard right. Presumably respondents then film and upload their answers to Kitara’s 5000-strong video library.

Its ready-built video templates make it easy for clients to film-it-themselves, and super-impose text and other effects. It deploys the adverts’ messages to a ‘highly engaged’ subscriber audience. Kitara also draws on relationships with a suite of health, lifestyle and casual gaming websites (some of which it owns) where the ads are displayed. YouTube, watch out, there’s a new video player in town. And obviously it has an in-house analytics package which quantifies phenomena including psychographic audience metrics (lifestyle, interests and values), as well as ‘Viewability’ and ‘Engagement’

A Design that endures long after you’re dead

Another marketing company with a strong digital footprint is Matthews International, which focuses on encapsulating brand identity through in-depth client consultation; either through graphic design and printing of labels and packaging, or through retail communications i.e. company intranet, website and social media. It also has a physical presence through its Crack division, which does installations and visual merchandising in-store.

Perhaps its most intriguing aspect is the Matthews Memorabilia division, which exploits an oft-overlooked market niche: death. Matthews Memorabilia distributes bespoke bronze and granite memorials, upright granite memorials and monuments, flower vases, crypt plates and letters, cameo portraits and innumerable other cemetery decorations. In addition to offering a very stylish range of coffin options, the company is also the self-described “leading designer and manufacturer of cremation equipment and cremation-related products in North America.” In the UK, where funeralcare seems dominated by the Co-operative Bank and its add-on business divisions, there could be room for a designer coffin-maker.

If not better than the rest, we’re certainly cheaper

Of course, your business plan can eschew new ideas for the base price advantage. Discount package holiday company, ‘At Play Vacations’, offers a nigh unbeatable price cut of 75% off retail price, to several activity-packed US resorts. Its differentiating factor is the adventurous leisure pursuits it can organise, including dog-sledding, snowmobile tours, helicopter trips and desert hikes. We were however underwhelmed by its incomplete website, whose contact details were “12345 Something Street, New York New York,” and whose single blogpost ran ‘Your article title. Copy should fit here nicely!”

But the idea we were most impressed by was one of the simplest. Digimarc Corp has patented a ‘digital watermark’ barcode which scans 50% faster than products using the current UPC technology. Furthermore, the entire package is scannable rather than just the narrow strip containing the barcode. Digimarc’s promotional video was highly persuasive, featuring interviews and testimonials from industry insiders like the ‘professional cashier – 9 years experience’ who claimed the practice would free up checkout attendants to develop much deeper and fulfilling relations with their customers.

Evolution and Survival in the European Bond Market

4 Feb

The European market for high risk premium, subordinated debt ballooned last year by 56 percent compared to 2012, with a net value of $123billion. Dealogic reported the impressive figures in December of last year.

Additionally, the capital raised by 32 new issuers was $14.7billion, 18 per cent higher than the value for 2012, which constituted the offerings of 30 new issuers. Part of this increase must be down to the improved and extended facilities offered to bond traders.

One is the BondMatch secondary trading forum initiated by Euronext, which has tight rules governing trading processes and matches bids and offers with a proprietary algorithm. Another is the Open Trading forum of MarketAxess, whose request for quote system connects an international chain of brokers, displaying all offers on one screen, and was credited with a record quarterly increase in trading volume.

The safeguards in place within BondMatch are not just requirements for Members to ensure the creditworthiness of their clients – and sustainability of their positions. They system itself prevents orders being carried out which are “clearly disproportionate in comparison to the liquidity of the Admitted Debt Security, evaluated on the basis of the market’s normal absorption capacity,” according to the Bondmatch trading manual.

It also bars block or distortionary trades, defined as “orders with a price which differs significantly from prevailing market prices”, or “which is obviously likely to trigger an excessive price swing or a reservation.”

Euronext claimed, in a mission statement, June 2010, ‘Euronext Paris SA’s response to the Expression of Needs expressed by the CASSIOPEE Committee’, that its pioneering platform was “designed to improve the liquidity of the secondary corporate bond market by being the first electronic corporate bond trading platform to offer international investors the possibility of trading firm orders with transparency obligations similar to those for regulated markets.”

Its proprietary algorithm ensures maximum continuity in pricing, as well as ensuring that the highest buy offers, and the lowest sell offers, take priority in order queues. This ‘execution priority principle’ is another factor lowering the risk of market manipulation, biased in the least likely direction of price distortion: traders are more likely to make bids that are too low than too generous.

data centre

There is a set formula, too, for the prices at the auctions at the opening and close of the trading day, which maximises efficiency of trades. Bids are placed in advance in the Central Order Book, and the auction price is that with the highest executable volume for each limit. If there is more than one limit with the top executable volume, the bid entailing the highest surplus volume is taken as the auction price.

Watch out for icebergs, though! Reserve orders, nicknamed ‘iceberg orders’, allow traders to conceal the true amount of bonds being released onto the market. Although the fake figure they give must not be greater than ten times the trading unit, this distinction will mean precisely peanuts to large institutional traders who have licence to dump over 100 corporate bonds onto the market. Some protection is given to buyers, in that reserve or iceberg orders cannot be stipulated to sell “at opening price”, or in an “all-or-none” order. And once the first package of, say, ten bond certificates out of 100 is sold, the remaining 90 (which is labelled as 10) goes to the bottom of the order queue.

The success of this approach is difficult to quantify, as Euronext releases its quarterly reports with aggregated figures from across its equity, debt and derivatives ventures. And its reporting has also been interrupted by the necessity of merging many of its operations with the InterContinental Exchange, as part of an acquisition deal finalised end of 2013.

For the third quarter of 2013, Euronext reported its European cash market share (value traded) in NYSE Euronext’s four core markets was 66% in quarter three, 2013; this was slightly reduced from 68% in quarter three of 2012; and also lower than the 67% it gained in the second quarter of 2013.

MarketAxess’ closest equivalent is the Open Trading forum for corporate; although it has considerable flexibility in type of additional bonds offered – ranging from emerging market, to domestic credit, to supras and covered bonds – all this must be conducted through what it claims, admittedly, is the “industry’s broadest, most robust network of global broker-dealers. In total its list comprises over 85 global, regional and specialist dealers, and in excess of 1,000 institutional investor firms.

As of April 2013, Open Trading entered a strategic partnership with BlackRock’s gargantuan, all-seeing risk management system Aladdin, which gives investors access to the global repository of information about the impact of extreme weather, financial or political events on securities’ risk profiles.

MarketAxess chairman and CEO Rick McKey attributed in large part the group’s 24.4% leap in fourth-quarter revenue to its Open Trading facility, citing “increased engagement from investors and dealers in our all-to-all trading protocols.”shaking hands on deal, skyscraper background

Of course, the firm also offers structured products, credit default and other types of swap, which can offer a lucrative commission for the issuer and the exchange hosting the trade. But pricing is more obtuse, and the swap derivatives require clearing by central counterparties, who approve the trade and can monitor collateral and margin posted.

However, the 14.9% increase in trading volume is that significant, its one-screen, instantaneous request-for-quote screen for high-grade, high-yield and emerging market bonds is no doubt to thank for its grabbing such a large slice of additional market share.